Forex Trading

How to Buy the VIX Step-by-Step Trade the VIX with Options

Before trading exchange-traded funds (ETFs) and exchange-traded notes (ETNs) tied to the VIX itself, it’s important to have a clear understanding of what the VIX really represents. While often presented as an indicator of stock market volatility (and sometimes called the “Fear Index”), that is not entirely accurate. Otherwise put, volatility is a constant companion to investors, which is why the Cboe Volatility Index (VIX) is such a widely tracked market index.

  • Let’s say that you have a long position on the stock of a US company that was a constituent of the S&P 500.
  • (As an added bonus fact, the average VIX value since its inception is 19.54).
  • In this article, we’ll review four ways you can trade the VIX using specific exchange-traded funds and exchange-traded notes.
  • Keep in mind, the VIX level that results from the opening SPX options prices may differ from the closing VIX level the evening before (see figure 2).
  • Still, for certain situations, the VXX is an excellent tool to trade market volatility.

Instead of buying S&P 500 puts a more effective way to prepare for a market downturn is to use VIX calls. You can buy calls on the VIX when you see that volatility is starting to creep up in the market. Now, this is not really the best way to trade VIX, as there are other ways to trade the VIX. However, when we put into practice this VIX trading strategy; we can notice that 11 sectors of the stock market when the VIX is low the market is often moving in a slow and steady bullish trend. So, if you were to follow this VIX trading strategy, you would have missed some of the biggest bullish trends out there. Trading VIX derivatives can be done using a variety of options, futures and other ETFs and ETNs that relate to the VIX, which includes the VXX, UVXY, VIXY, VIIX or TVIX.

Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold. TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. Find out more about a range of markets and test yourself with IG Academy’s online courses. The current volatility cannot be known ahead of time, so the VIX is best used in tandem with historical analysis of support and resistance lines.

What is VIX?

Positions in the underlying VIX futures contracts are always offset before the delivery date or offset in cash on the delivery date since there can be no delivery of the index. Also, options expire worthless if transacting at their strike price is less favorable than at the prevailing underlying market on their expiration date and time. Volatility is a measure of dispersion seen in financial instruments. Volatility is represented by the CBOE Volatility Index (VIX) and investors have sought ways to trade this index, primarily as a means to hedge their portfolios.

However, if you had taken a long position and there was no volatility in the market, your position would have suffered a loss. If you were wrong, and volatility didn’t increase, your losses to your VIX position could be mitigated by gains to your existing trade. By taking a position on the VIX, you could potentially balance out Forex quotes other stock positions in your portfolio and hedge your market exposure. The VIX is calculated using the prices of SPX index options and is expressed as a percentage. If the VIX value increases, it is likely that the S&P 500 is falling, and if the VIX value declines, then the S&P 500 is likely to be experiencing stability.

But absent some fundamental change in the markets that render the professors’ research no longer useful, their approach deserves serious consideration. They showed that you can boost your risk-adjusted performance over the long term by gradually increasing your equity exposure as the VIX falls, and vice versa. Our favorite strategy of all time to trade the VIX is to follow the smart money. We use a combination of institution-level algorithms and professional trader oversight to scan through every option trade made throughout the day, hunting for the ones that stand out as unusual. So, are you ready to buy the VIX, or take on the thrilling world of trading VIX options? With a bit of knowledge, some courage, and a dash of strategy, you can ride the ups and downs of market volatility like a pro.

Stock Market Volatility ETFs and ETNs

While VIX is the most common stock market volatility index, there are several ETFs and ETNs that track market volatility as well. When you trade the Volatility Index with CFDs, you are agreeing to exchange the difference in price from when you opened the position to when you close it. Like with spread betting, the more that the Volatility Index moves in the direction that you have predicted, the more you would profit and the more it moves against you, the more you would lose.

Options Strategies to Trade The VIX

Do this during a major stock market selloff, as shown in the image below, or after the release of a significant economic number. As a result, the performance of the VXX is stronger in the short term but not in the long term. Below are the investment returns based on various time periods as of June 30, 2023. This ETN holds a long position in first and second-month VIX futures contracts that roll daily. Because there is an insurance premium in longer-dated contracts, the VXX experiences a negative roll yield (basically, that means long-term holders will see a penalty to returns). This is not the Black Scholes model—VIX is all about “implied” volatility and measures the market’s expectations for volatility over the coming 30 days.

Determining Market Direction With VIX

It’s important to be aware of what type of market conditions you will be trading in. Furthermore, historical volatility, which is also called known or statistical volatility, can be measured objectively for a given past timeframe. This is done by computing the standard deviation of price changes observed on some basis (say from close to close) and then annualizing the result. Because inverse ETFs can rack up significant losses quickly, they are designed for knowledgeable investors who should carefully consider their risk tolerance before investing. Below are the performance returns of the SVXY based on available time periods as of June 30, 2023. As for their financial situation, in the second quarter of 2023, they recorded net revenues of $6.5 billion.

Although investors can’t directly trade the VIX, they can trade VIX futures and options with the appropriate account approvals. The calculation of the VIX involves extremely complex mathematics, though it isn’t necessary for every trader to understand this in order to trade the index. These final values will estimate the future volatility of the S&P 500. The VIX measures S&P 500 options, which are options contracts that take their prices from Standard & Poor’s 500 – a capitalisation weighted index of 500 stocks in the US.

VXX is a type of product, specifically an Exchange Traded Note (ETN), used to trade volatility on the S&P 500, while VIX is an index measuring volatility. For example, if you thought that the S&P 500 was going to experience a significant and rapid decline following a political announcement, you might take a long view of volatility. It is important to note that CFDs are complex instruments and your losses or profits could outweigh your initial deposit amount due to leverage. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Most experienced professionals who focus on volatility trading are both buying and selling options. However, new traders often find that their brokerage firms do not allow them to sell options. By buying VIX calls, puts, or spreads, new traders gain access to a wider variety of volatility trades. Trading these securities for short-term profits can be a frustrating experience because they contain a structural bias that forces a constant reset to decaying futures premiums. This contango can wipe out profits in volatile markets, causing the security to sharply underperform the underlying indicator.

We believe everyone should be able to make financial decisions with confidence. That’s the reason why the best way to trade VIX is through options. The most straightforward approach is to buy an Exchange Traded Note (ETN). The most popular ETN on VIX is the VelocityShares Daily Inverse VIX (XIV).

The VIX reached a closing high of 80.86 during the 2008 financial crisis. However, the VIX reached a new record high close of 82.69 during the bear market of 2020. Diversification, which most investors find highly desirable, is useful only if the securities selected are not correlated.

Many professional investors, hedge fund managers, individual traders and speculators use the VIX to measure market risk ahead of taking action in the stock market. Option market makers and risk managers might also use the VIX to lay off exposure to implied volatility in their S&P 500 options portfolios. Whether you’re looking to hedge a long portfolio, or weary of a looming market surprise, it’s important to know how to buy the VIX, and how to trade the VIX with options.

NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance. The VIX chart generates vertical spikes that reflect periods of high stress, induced by economic, political, or environmental catalysts.

In other words, if you own ten big tech stocks that tend to move together, then you aren’t diversified. Measure volatility trends with long- and short-term VIX charts, looking for sympathetic fund plays. Rising VIX tends to increase the correlation between equity indices and underlying cloud computing stocks components, making long-side fund exposure more attractive. Falling VIX reverses this equation, supporting short-side entries that require profit-taking while VIX returns to longer-term averages. One of the most common VIX trading strategy used for portfolio hedging is using VIX calls.

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