{Sept|Sept. 2010|The month of september} 11, 2001. I was on the F {teach|coach} going from my home in Brooklyn to my Manhattan office. When {We|I actually|My spouse and i} got in, someone {informed|advised} me one of the towers had collapsed. Persons were crying - their friends were in those towers.
My office was uptown on Park {Method|Opportunity|Path} about three miles from {in which the|where|the place that the} planes had {strike|struck}. Was another plane {arriving|approaching} {hitting|going to|heading to} us too?
{We|I actually|My spouse and i} don't panic in these {sorts|varieties} of situations. {Seeing that|As} the markets were {shut|shut down|sealed}, I left {work|any office|school}, {proceeded to go|gone|travelled} to an ATM and took out as much money as I could. Then I started walking to a friend's house to call my {mother|mommy} to leave her know I was OK.
{I have|We have|We've} been on my own from {time|enough time} I was a kid in India - boarding schools until I was 16 and then leaving my family at 18 to come to the U. {H|T|S i9000}. for college. When {if you're|most likely|you aren't} {by yourself|all on your own}, it teaches you to deal with {difficult|hard|challenging} situations... and how to make decisions under stress.
Growing up this way has helped my {trading|investment|making an investment}. I don't panic in extreme situations, {which is|and that is} helped me {generate profits|earn a living} when others lose money... like in the crash/bear market in 2008 and the {the one that|the one which} happened between 2001 and 2002.
Terror is {stunning|dazzling|hitting} our markets again. {Best|Most suitable|Best suited} now, we're coping with the worst {learn to|commence to} doze months ever. Are our markets are safe? {We|I actually|My spouse and i} have the indicator that you should be {viewing|observing|seeing} to help answer that question...
Well, I {cannot|aren't|won't be able to} guarantee it, but {We|I actually|My spouse and i} {believe|assume that} our markets are safe today. Why?
{Once|When ever|The moment} you're a big-time money manager as I was - managing a $5 billion hedge fund and overseeing billions more - {you'll want|approach} confidence based on your understanding of {exactly what is|can be|precisely} going on in the market and after that happen next.
After all, the near future is always unknown. But if you have the right tools, you have a good shot of {looking forward to|expecting|wanting} how everything is heading to unfold... {which|and this} {provides|offers} you the confidence to make your bets.
{1|A single|One particular} tool you need in your toolbox is something that will be able to tell you if markets are crash-y. {Some thing|Anything|A thing} you can look at when things are heading crazy {to split up|to separate your lives} facts from emotion and perception from reality.
{Recently|Immediately|Soon}, I'm heading to go over a tool... {the one that|the one which} I use to figure out if markets are crash-y. And this tool is the reason why I'm not {concerned about|concerned with} the terror {episodes|problems|disorders} in Brussels crashing our markets.
When the VIX Soars, Stocks Crash
{Once|When ever|The moment} I'm taking a look at the overall stock market to figure away if markets are crash-y, I base my {evaluation|research|examination} mostly on what's heading on with the A.M BEST 500 Index. The A.M BEST is the most {broadly|extensively|generally} known index, or {container|holder|bag} of stocks, {in the world|on the planet|that is known}. {It can|Is actually|Really} what people mean when they refer to "the market" in the {Usa|Combined|Unified} States.
We're trying to figure out if the stock market is crash-y - meaning, will the price of the A.M BEST 500 {have a|require a} sudden {fall season|show up|land}? Obviously, {we would like to|you want to|we wish to} figure this out before it happens. To do this, you have to find the S&P 500's nemesis.
{Simply by|By simply} nemesis, I mean something that shows you the other side. {Think about|Consider|Imagine} Batman versus the Joker or Superman versus Lex Luthor.
The S&P 500's enemy is the CBOE {Marketplace|Industry} Volatility Index, or more commonly referred to as VIX. When the VIX soars, markets crash.
In a very simple way, the VIX {informs you|lets you know|notifys you} what traders are willing to {spend on|purchase|pay money for} out-of-the-money S&P five-hundred put options.
People buy out-of-the-money put options when they are worried that the stock market is going to crash or, at the very least, go down {a great deal|a whole lot}. The puts offer {safety|security|safeguard}.
Let's look at an example to make this easy {so that you can|that you can} understand. {State|Claim|Declare} the S&P 500 is at the two, {500|1000} level. You're {a huge|a major} money manager and you're {concerned|anxious|bothered} that the market {will|will probably|is likely to} crash. You start buying S&P put options at the 1, 600 level, or 20% below the current level.
Now, if the market crashes {50 percent|fifty percent} like it did in 2008, the value of this option soars higher, effectively offsetting the {deficits|loss|failures} in your portfolio after the first 20%. {In a nutshell|In other words|To put it briefly}, you've bought crash insurance.
For our purpose today, you can think of the VIX as the index that {informs you|lets you know|notifys you} the price of crash insurance for the stock market.
When times are good, crash insurance sells cheap. When times are bad, crash insurance sells high.
My experience - built over 20 years of hands-on trading and {controlling|handling|taking care of} a $5 billion hedge fund - is that when the VIX index is low but {continuously|gradually|progressively} rising... that's bad. {Frequently|Generally|Typically}, it's a sign {that the|which a|a} crash is coming. {Or possibly a|Or maybe a} bear market.
You can see a similar {habit|tendencies|patterns} for market crashes since the VIX was created in 1989. VIX low and rising is an early-warning CRASH ALERT {indication|sign|signal}.
Wise Buying Cheap Insurance
Here's why this {indication|sign|signal} works. Possibly the VIX at {a minimal|a decreased} level but it keeps rising, it means that wise is buying up crash insurance when it's cheap {since it|as it} sees the rising {possibility|likelihood} of a crash. {Because|Since|While} they buy, they {bet|wager|put money} the price up {a little|a lttle bit|somewhat}, which in turn {forces|shoves|promotes} the VIX higher.
Of course, as {the marketplace|industry|the industry} {impact|lock up|drive} hits, the dumb money comes to buy {impact|lock up|drive} insurance at any price, sending the VIX {rising|increasing|leaping} higher to crazy levels.
{Main point here|Important thing|Final conclusion}: The best {indication|sign|signal} by my 20 years of money management {of the|of any|of your} coming crash is a VIX at a low level that's steadily {increasing|growing}. That's because it's {informing|showing|sharing with} you that the real smart-money folks are buying up crash insurance {pending|till} a crash.
