How to Trade the VIX: 4 Ways Explained


how to trade the vix

A reading above 20 means that the market is fearful, which brings higher volatility. Hence, volatility 75 is often considered a risky and unstable market. The volatility or market uncertainty index (VIX) is an invaluable tool used by many when analyzing markets.

The VXX is issued by Barclays Capital and has an expense ratio of .89% and more than $537 million in assets under management (AUM) as of April 2022. VIX is a weighted mix of the prices for a blend of S&P 500 index options, from which implied volatility is derived. VIX really measures how much people are willing to pay to buy or sell the S&P 500, with the more they are willing to pay suggesting more uncertainty.

Settlement of VIX Derivatives

The maximum gain is $450, which is calculated by taking the difference in strike prices less the premium paid ($500 less $50). The total cost of this trade is $50, and that is the maximum loss potential on the trade. Get a custom-designed trading program tailored to your individual needs, skill level, and schedule. They come in ETN or commodity pool structures, not as traditional mutual funds. ETNs carry the counterparty risk (usually low) of the issuing banks, while commodity pools issue K-1’s at tax time.

how to trade the vix

The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (Member SIPC), offers investment services and products, including Schwab brokerage accounts. Its banking subsidiary, Charles Schwab Bank, SSB (member FDIC and an Equal Housing Lender), provides deposit and lending services and products.

When options traders think the stock market is likely to be calm, the VIX is low; when they expect big swings in the market, the VIX tends to go up. Real-time pricing of funds decays through contango, which reflects timing variations between a futures contract and spot prices. These calculations can squeeze profits in volatile markets, causing the security to sharply underperform the underlying indicator. As a result, these funds work best for short-term strategies that utilize aggressive exit techniques, long-term strategies, and hedges, and in combination with VIX futures and protective options plays. Many market players avoid price prediction entirely during stressful periods.

What is the VIX index?

Market participants have used VIX futures and options to capitalize on this general difference between expected (implied) and realized (actual) volatility, and other types of volatility arbitrage strategies. At the most basic level, the VIX index is constructed using weekly and traditional SPX index options and their levels of implied volatility. One can think of implied volatility as expected volatility derived from market participants’ activity in the options market. Understanding why the VIX behaves inversely to the S&P 500 is important because the volatility index acts as a measure of market sentiment, hence the reason it is called a “fear barometer” or “terror index”.

  • As such, both are suitable for tracking the performance (or the inverse) of the VIX given a short time horizon.
  • Please read the Risk Disclosure for Futures and Options prior to trading futures products.
  • Still, for certain situations, the VXX is an excellent tool to trade market volatility.
  • Note that any subtle differences between the price of the synthetic stock position and the VIX future can be attributed to using the mid-price of the options in the synthetic and the mid-price of the VIX future.
  • This is partly because of normal overnight activity in the global equity markets, but a number of factors may influence the actual settlement price.

Underlying VIX futures can experience contango even when the VIX is flat. As we can see, the deep-in-the-money January VIX put is priced almost perfectly to the price of the January volatility future. So, don’t be fooled by any potential “mispricings” when examining options on the VIX. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. If you don’t feel confident enough to start trading on live markets, you might want to consider opening a demo CFD trading account. An IG demo account comes preloaded with $20,000 virtual funds, which can be used to practise trading thousands of markets.

CBOE Volatility Index Guide

Previously, VXX had a 10-year maturity, whereas the series B is a 30-year ETN and matures on Jan. 23, 2048.

  • The VIX futures and index option markets have experienced tremendous volume growth over the past few years.
  • It is always derived from the prices of SP500 index options with a short-term expiry date and generate volatility projections for the next 30 days.
  • Our Electronic money institutions are Neteller and Skrill authorized by FCA of the United Kingdom and Cardpay authorized by Central Bank of Cyprus.
  • Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses.

Testimonials on this website may not be representative of the experience of other customers. No testimonial should be considered as a guarantee of future performance or success. While the VIX index can’t be directly traded (just as you can’t trade the Dow Jones Industrial Average (DJIA)), there are ETFs that track and mirror the VIX, which can be traded. Many of these ETFs and ETNs carry additional risk through embedded leverage and an eroding cost structure. Examples provided are for illustrative purposes only and not intended to show actual investments or to be reflective of results you should expect to attain. Now that you know the basics of how options on the VIX work, let’s go through some settlement examples.

Last week, I spotted a reversal pattern in Invesco QQQ Trust (QQQ), the ETF that tracks the Nasdaq 100… I hope everyone had an enjoyable and safe Independence Day celebration — and by safe, I mean I hope you kept all your digits intact. The markets were closed on July 4 and only open a half day on July 3, which means we had a short trading week…. This strategy is typically best employed when the VIX ‘signal’ arrives within the context of a general bullish trend in the S&P 500. It’s a real-time index which reflects market participants’ expectations of volatility over the next 30 days. Successful trading relies on having good information about the market for a stock.

Inverse/Leveraged Volatility Funds

It’s crucial that traders don’t assume the VIX always correlates directly with the SPX. It’s a volatility measure first and foremost; therefore, VIX can spike up when the SPX goes from low volatility to high volatility spikes to the upside. This misunderstanding has caused many traders to blow out their accounts, assuming the VIX is a directional tool and must revert back to negative correlation with the direction of the SPX. While negative correlation usually exists with the SPX, traders must have the agility to spot when that correlation fades. This is especially crucial if using it as a hedging tool to offset long positions.

For example, since it’s generally expected that the VIX and SPX will move inversely to one another, VIX calls could be used to hedge long stock positions. However, since a steady drift lower in the SPX won’t necessarily translate into a major VIX spike, this type of hedge is an inexact science. Instead, the underlying asset is the expected value of the VIX at expiration. In other words, the value of VIX options is more closely correlated with VIX futures than the real-time VIX.

how to trade the vix

Commodity-related products are also subject to unique tax implications such as additional tax forms and potentially higher tax rates on certain ETFs. With IG, you can use CFDs to take a position on the movement of the VIX, as well as VIX futures and exchange traded funds (ETFs). Note that we price our VIX index in a different way to the rest of our cash index markets. We follow the method used to derive our undated commodities, by creating a price between the two nearest futures contracts on the underlying market, as these tend to be the most liquid markets.

Tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. Tastytrade and Marketing Agent are separate entities with their own products and services.

There’s a new buzzword in every financial news story, every earnings announcement… I’m talking about AI… Artificial Intelligence. And honestly, why wouldn’t companies start highlighting their AI bonafides? Now, over the past few weeks, I’ve been focusing more on trader education. It’s the difference between rolling the dice with your money and actually being a successful trader. Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano.

how to trade the vix

Astute investors tend to buy options when the VIX is relatively low and put premiums are cheap. Volatility is one of the primary factors that affect stock and index options’ prices and premiums. As the VIX is the most widely watched measure of broad market volatility, it has a substantial impact on option prices or premiums. A higher VIX means higher prices for options (i.e., more expensive option premiums) while a lower VIX means lower option prices or cheaper premiums.

The Cboe Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants. Futures and futures options trading involves substantial risk and is not suitable for all investors.

At xStation, we provide real-time quotes for future contracts on VIX by offering VOLX instrument. VIX trading is speculative and for active traders only the price fluctuations matters on this instrument. This type of contract is a financial agreement which pays out the difference in settlement price between open and closed transaction without any physical delivery of the traded instrument. Then when the S&P 500 index rises, the VIX is likely to fall and you can realise a profit. A short position on the VIX is, of course, risky because circumstances could occur at any time that would cause negative sentiment among investors to resume. The buyer also gave themselves plenty of time to be right — in this case, about 8 months.

The contango problem isn’t purely academic; VIX futures contracts have often been more expensive than the VIX index. According to Bloomberg, in 49 of the past 60 months dating back to April 2016, the three-month VIX futures contract was above the VIX level. A futures contract is an agreement to deliver something at a certain point in the future, for a price that’s agreed upon in the present. The first futures contracts were for commodities such as wheat and corn, and they’re available for many commodities now, including oil and natural gas. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.


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