Playing Volatility with ETFs

The WSJ’s Weekend Investor column took a look at Playing the Market Plunge after last week’s wild market swings. One example–in Thursday’s volatile trading, the Vanguard Industrials ETF (VIS) fell from the $50s to $0 at one point in the afternoon before returning to normal levels.

However, the article points out that high volatility can create opportunities for profits. One way to reduce the volatility of a stock portfolio is to sell call options on the stocks in the portfolio, sometimes called a Buy-Write strategy and accessible through an exchange traded fund with the PowerShares S&P 500 Buy-Write ETF (PQBW). Another approach is to buy volatility directly through the iPath S&P 500 VIX Short-Term Futures ETN (VXX) which tracks the VIX volatility index.

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