The volatility ETF $VXX is a risky investment during most market periods. However, during this particular time it may be a great risk versus reward play. Why?

1. Volatility is near all time lows. Historically, the VIX (Volatility Index) below 12 always sees a pop back to at least 18 on any uptick in fear. This is a 50% gain. The lowest the VIX has ever been in the past decade is 10. So the risk versus reward is definitely in favor of buyers here. Less than 20% downside against a gain of 50%.

2. The key is also timing with the Volatility Index. The $VXX loses value over time so that begs the question, is now the right time? Signals are pointing to yes. Complacency is near all-time highs. This tells you there is a total lack of fear in the market. Historically this has been the exact time to buy volatility because it is cheap. This same environment was seen in 2007 just before the financial crisis.

3. Key reversals in sectors today like the $IBB (biotech) and $SMH (semiconductor) indexes tell us we could be on the verge of selling in the market. The $VXX jumps when the markets are lower. For example, the VXX is up $1.00 on the day because the markets are slightly lower. Any sort of major selling could see the VXX jump 10-20-30%. It is not uncommon for the Volatility Index to jump 30% plus in a day if fear hits the market.

Ultimately, the VXX is only a short-term trade but I believe it is the right trade here. Minimal downside near term with maximum upside potential.

Jenny Rebekka