The Best Ways To Profit From, And Safeguard Against, Market Volatility

Forbes

18-04-2025

In a year when the stock market has primarily been driven by the whims of President Donald Trump's tariff policies and social media posts, it's even harder than usual to forecast whether the market will move up or down in the next week, or even day.In a year where the stock market has primarily been driven by the whims of President Donald Trump's tariff policies and social media posts, it's even harder than usual to forecast whether the market will move up or down in the next week, or even day.
The S&P 500 index crashed 10% in a two-day span after Trump's already infamous press conference announcing his 'Liberation Day' reciprocal tariffs on 90 countries on April 2, then rallied 9.5% a week later when he backtracked on most of them. The index is still down 14% from its record high in February and 10% year-to-date. The Chicago Board Options Exchange's Volatility Index, known as the VIX, measures the expected forward-looking volatility of the S&P 500 and is currently at a historically high level of 30. That effectively means that traders expect the S&P 500 to move 30% in either direction in the next 12 months—a value less than 20 would be typical in a more normal, stable environment. Last week, before Trump announced the pause in tariffs, the VIX spiked above 50 for only the third time in the last 20 years, joining the October through December 2008 Financial Crisis levels and the onset of the global pandemic in March 2020.
All of these spikes have corresponded with market crashes, branding the VIX as a fear gauge. For lucky passive investors, with iron constitutions, the previous instances have turned out to be great opportunities to simply buy stocks. But for more advanced market players typically use options to hedge their bets, there are VIX-focused funds that could be attractive short-term options.
There is no way to invest directly in the CBOE's VIX, but Bethesda, Maryland asset manager Proshares offers an exchange traded fund known as the VIX Short-Term Futures ETF (VIXY), which buys short-term call options on the VIX. It is up 44% since April 2. Proshares also offers the Short VIX Short-Term Futures ETF (SXVY) which shorts the VIX, betting that volatility will go down. Because the VIX and the stock market generally move in opposite directions, though not always, VIXY tends to behave similarly to an S&P 500 put option, betting the market will fall, and SXVY behaves similarly to the inverse, a call option betting that stocks will rise.
'When the VIX does what it just did, buying options is two to four times more expensive. All of a sudden, those of us who like to buy puts and calls on major indexes are now fighting with one hand behind our back,' says Rob Isbitts, the founder of Sungarden Investment Publishing, describing how the VIX is derived from the prices of S&P 500 options—a VIX of 30 means options are double the price of when the VIX is 15.. 'Maybe 5% or 10% of the time over the next several years, I would use VIXY and SVXY, but this is one of those times.'
Proshares puts a disclaimer on both of these ETFs that they're intended for short-term use and investors should monitor their investments as frequently as daily, and there's good reason for that. The VIX moves so jaggedly that any profits can be short-lived, and over the long-term, most of these options will expire out of the money and losses are all but guaranteed.
For investors wanting to smooth out stocks' rockiness in a single fund, some firms blend volatility protection with a more diversified portfolio of stocks. Chicago-based Equity Armor Investments manages $171 million in assets in funds like its Rational Equity Armor Fund (HDCAX), which invests primarily in dividend-paying companies in the S&P 500 and also invests up to 20% of its assets in VIX futures contracts. It has a model to determine which options are cheap or expensive and avoid the natural decay associated with rolling VIX options, says co-portfolio manager and chief trading officer Joe Tigay. He portrays the fund as an alternative to balanced 60/40 portfolios, now that bonds haven't acted as a hedge on stock exposure this year the way they often have in the past.
Tigay says the fund typically has about 15% of its assets in its volatility strategy and 85% in stocks, and that can vary depending on the market. When the VIX spikes, the fund can move some of its profits from those options into stocks to smooth out the return, and when stocks rise, VIX futures in turn get cheaper. That helped make its maximum drawdown in 2020 a 15% loss, when the S&P 500 crashed 34%. Its five-year annualized return of 7.1% underperforms the S&P 500's 14% mark, but beats the Morningstar Moderately Conservative risk index it benchmarks to by three percentage points. So far in 2025, it's down 4.8%.
'When there's a lot of volatility, it's not scary, it's actionable, and it allows us to maneuver in the market,' says Tigay. 'It's a built-in sell-high, buy-low strategy.'
Plenty of funds also offer covered call strategies which cap upside by selling out of the money call options on an index but offer a buffer against declines by distributing income from these options. The largest is JPMorgan's Equity Premium Income ETF, which has $37 billion in assets and offers an 8.2% yield. But Isbitts cautions that those haven't been tested in prolonged bear markets and prefers buying put options directly for protection against individual stock holdings.
'What good is getting the income if you're effectively paying yourself with stock losses,' says Isbitts. 'If we have an extended bear market, covered call ETFs will be remembered as the investment that everybody loved because they did not realize what could possibly go wrong.'