The market's 'fear gauge' may be saying now is the time to buy stocks

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Volatility roars back

One options expert has a message for investors: it's time to stand up to fear.

The Cboe Volatility Index, which tracks the level of worry in the market and is commonly known as the VIX, spiked to its highest level since January on Thursday amid increasing concerns about U.S.-China trade negotiations.

But that spike could prove to be a counterintuitive signal, said Brian Stutland, chief technology officer at Equity Armor Advisors.

"As people run to the exits, so to speak, and fear rises ... that typically has been a bull opportunity in the market," Stutland said Thursday on CNBC's "Options Action."

Stutland took to history to back up his point: the average return from the S&P 500 four weeks after a spike in the VIX is roughly 2.5%, and the average return 12 weeks down the line is more than 4%, he said.

"So not every reward comes with risk," Stutland said. "We have definitely seen the market drop 9% after that spike happens. The market could roll over, but when I look at the technicals going on in the marketplace and the fundamentals, I think 2,815 or so on the S&P is a level I'd be willing to buy here."

Stutland, resident volatility expert at "Options Action," added that although a break below the 2,815 level could send the S&P to as low as 2,715, he still sees opportunity stemming from the panic.

Even if China holds out on cutting a trade deal with the U.S., "you have the Fed put: traders expecting a rate cut later this year. So, certainly, that would fuel some fire back to the upside," Stutland said.

"If we get a Fed rate cut, I think that buoys the market," he continued. "That, at least, is behind everything here. So I'm not too fearful. I took a lot of my hedges off, I'm almost flat on my VIX positions now and really playing the market back to the upside as you normally would indicate as getting a VIX spike like we saw over the last few trading days."

The VIX rose 4% in Friday trading as stocks fell after a rise in U.S. tariffs on Chinese goods and what appeared to be an end to the latest U.S.-China trade talks.