Can anyone help walk me through this logic about the VIX?
I'm currently listening to the All In Podcast, and Chamath Palihapitiya said the following:
"You buy volatility and short stocks when the VIX is below 20. When the VIX is in the 30s, you short volatility and buy stocks."
Let me know if I'm understanding this correctly – during times of low volatility, you should short stocks in preparation for volatility to enter back into the market. Volatility rising is a signal that money is moving around the market. So during times of high volatility, you should buy back in because we have likely reached that local bottom.
If I'm understanding correctly, here's the play I'm considering. Today, $TSLA is down ~6%. My initial instinct was to buy at the end of today's session for what I assume will be a green day on Monday. But the VIX is currently sitting at 21. So I should technically short TSLA in preparation for volatility returning to the market, based on the above logic.
Am I properly understanding this? And is this something you agree with? Thanks for the help.
No. VIX is the index that tracks the expected volatility of the S&P500. A hand wavy manner to derive VIX is to take the implied volatility (IV) of 30 days options trading on S&P500.
If you want to do this with just $TSLA, it is better to look at the IV of options expiring on $TSLA within 30 days and then make a judgement. Looking at VIX for this trade will just give you expected volatility of S&P500, whereas historically $TSLA has been more volatile than the index. You can probably do the same trade with a basket of stocks.
Side note: Chamath is a not a very good person to take advice from. He has routinely pumped stocks and then dumped it on retail before.