What is the Volatility Index (VIX)?
The Volatility Index (VIX) is an index of the stock market showing the expected stock market volatility over the next 30 days. It is calculated and administered by the Chicago Board Options Exchange (CBOE).
The calculation is based on call and put options of the S&P 500 Index – investor sentiment of the S&P 500 Index.
In essence, if the Volatility Index value increases, it means that volatility in the stock market will increase in the next 30 days.
If its value decreases, the volatility in the stock market is expected to dip in the next 30 days.
A VIX value above 20 means that volatility will be high while a value below 20 means that volatility will be low.
Volatility is where the market prices fluctuate fast and sharply.
These conditions present very many trading opportunities and also very many risks. Most traders, including the big fish in stock trading, make use of high volatility market conditions to make a kill.
The Volatility Index (VIX) comes in handy to solve the high-risk nature of high volatility markets.
The Index then helps to predict how volatility is likely to be in advance so that you can prepare accordingly.
This means that traders of ranging markets will shrink while those that prefer high volatility will anticipate gains if the Volatility Index (VIX) hints a rise in fluctuations.
Trading the Volatility Index (VIX).
Whereas the Volatility Index (VIX) is an index or a measure of volatility, it can actually be traded as an asset on the stock market.
In a similar manner, products related to the index can also be traded by the use of hints drawn from the index. Trading the VIX involves investing money based on the direction of volatility being measured by the index.
In doing so, you anticipate to either make or lose money. There are actually two ways of making money trading the Volatility Index:
- Trading Volatility Index (VIX) Options.
- Trading VIX Exchange-Traded Products.
How to Trade Volatility Index (VIX)
Trading VIX Options involves trading in the possible direction of the Volatility of the stocks within the S&P 500.
Here, you make a prediction about whether the underlying market volatility will increase or decrease.
Earning money or losing it depends on whether your forecast comes to pass or not.
This, in essence, works as a call and put options.
Call options will see you make money if the VIX value, at the time the trade expires, is above the value at entry.
Conversely, put options will see you make money if the VIX value at expiry is below the value at entry.
What all that means is that you are basically trading VIX Options just like you would be trading Currency Options.
Predict correct and earn a specified percentage of your invested amount, predict wrong to lose all your invested amount.
Follow the following steps to trade Volatility Index Options:
- Look for a broker that offers the VIX Options product like CBOE and other brokers.
- Consider broker requirements.
- Be approved to Trade Options if that is a requirement.
- Sign up with the broker and deposit money.
- Open the broker platform and select the VIX Option.
- Begin trading VIX Options adhering to proper money management – Up and Down Options or Call and Put Options are the basis of VIX Options trading.
- Make profits and withdraw.
It is that simple to make money trading Volatility Index Options.
Trading VIX Exchange-Traded Products.
Trading Exchange-Traded VIX Products involves buying and selling Exchange-Traded Products related to the Volatility Index in a similar manner as stocks and ETFs.
VIX Exchange-Traded Products whose price changes are proportional to VIX changes include:
- S&P 500 VIX Short-Term Futures ETN (VXX).
- S&P 500 VIX Mid-Term Futures ETN (VXZ).
- VIX Short-Term Futures ETF (VIXY).
- VIX Short-Term ETN (VIIX)
This means the above exchange-traded product that tracks the Volatility Index have their prices rising and falling with the VIX.
If you expect a rise in the Volatility Index, you buy such exchange-traded products.
Conversely, if you expect a fall in the Volatility Index, you sell such exchange-traded products.
However, there are other products that move opposite the Volatility Index.
If you expect the VIX to rise, you sell those products whereas a looming VIX drop will mean a rise in the XIV. These include:
- Daily Inverse VIX Short-Term ETN (XIV).
- Short VIX Short-Term Futures ETF (SVXY).
- Daily 2x VIX Short-Term ETN (TVIX)
- Daily Inverse VIX Medium-Term ETN (ZIV).
- Ultra VIX Short-Term Futures ETF (UVXY).
The safest thing to do is to ensure that you employ proper money management systems.
That way even if you lose in some products here and there, you are still stable and can continue trading. This will see you not only covering your losses but profiting more and more beyond recovery.
Follow the following steps to trade VIX Exchange-Trade Products:
- Look for a broker that offers VIX Exchange-Trade Products.
- Comply with all broker requirements.
- Comply with the law.
- Sign up with the broker and deposit money.
- Open the broker platform and select any VIX Exchange-Traded Products.
- Analyze the Volatility Index and establish whether it will rise or fall.
- If you anticipate a rise in the Volatility Index, buy the VIX Exchange-Traded Product.
- If you anticipate a fall in the Volatility Index, sell the VIX Exchange-Traded Product.
- Apply proper risk management like the use of reasonable risk to reward ratios to set your Stop Loss and Take Profit.
- Keep tracking the performance of the VIX Exchange-Traded Product you invested in to time exit.
- Once conditions are right for the exit before your Take Profit is activated, be sure to exit.
- Look for other trading opportunities and repeat them.
As simple and that, and you are already making money trading VIX Exchange-Traded Products.
Instead of using the Volatility Index to determine the future degree of volatility within the S&P 500 Index, you can profit from trading it.
This is by trading VIX Options or VIX Exchange-Traded Products as discussed above. Get your fair share of profits off the stock market by trading the VIX.