The market is flashing a big 'buy' sign: Trader

On Friday's "Options Action," Equity Armor Investment CIO Brian Stutland noted that the last 20 times the VIX has spiked above an elevated reading of 20, the average return in the S&P 500 three and six months later has been a respective 9 and 13 percent.

"Investors have been hugely rewarded if you went out and bought stocks [following these VIX spikes]," said Stutland. "I think it's time to step in and dip your toe in the water here." The VIX surged 10 percent on Friday to close at 22. It is off slightly Monday but still hovering above 20.

The VIX is often called the "fear index" because it tends to rise in periods of market volatility. That's because what the VIX really measures is how much investors are willing to pay to protect their portfolio from market declines. The greater the fear, the more investors are willing to pay for insurance in the form of put contracts.

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But if the index is a good measure of fear, it is also a good measure of capitulatory sentiment in the market. Spikes in the VIX have corresponded with selloffs in equities, but when the VIX jumps above 20, it has tended to signal retreat for the bears and opportunity for the bulls.

"I don't think 20 is the magic number per se. I just think that anything above that level represents fear and not actual or realized volatility in the market," said Stutland.

Since the VIX captures options prices, it is a good measure of how much traders think stocks will move around. According to Stutland, once it gets too high, the VIX often stops reflecting actual moves in equities and instead measures market fear and negative sentiment. When fear is greatest, opportunity arises.

Said Stutland, "I like to buy fear."


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    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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