Monday, August 17, 2009

How to Trade the VIX

Based upon the search terms that are landing visitors on the blog this morning, it seems as if many readers are interested in how to trade the VIX. This question really boils down to two separate issues: strategies and trading vehicles.

Since I have talked about strategies repeatedly in this space in the past, I thought I would offer a quick summary of trading vehicles today.

First off, it is not possible to trade the VIX directly. Formally known as the CBOE Volatility Index, the VIX calculates market expectations of 30 day implied volatility for S&P 500 index options. The VIX (sometimes referred to as the cash or spot VIX) is a statistic that the CBOE calculates and disseminates every 15 seconds during the trading day. While widely disseminated, this statistic is not available for purchase.

Fortunately, there are a number of VIX derivatives that allow traders to take positions on the VIX without owning the underlying. In no particular order, they are:

  1. VIX options – these include standard options as well as VIX binary options

  2. VIX futures – standard VIX futures contracts have a contract size of 1000 times the VIX; the recently added mini-VIX futures have a contract size of 100 times the VIX

  3. VIX ETNs – currently consists of two exchange traded notes: the iPath S&P 500 VIX Short-Term Futures ETN (VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ). The former targets one month VIX futures and the latter targets five month VIX futures.

In addition to VIX products, one can always trade options on the SPX (or SPY). A long VIX position is very similar to a long SPX straddle (or strangle); a short VIX position is very similar to a short SPX straddle (or strangle.)

For some additional reading on these subjects, readers are encouraged to check out:

3 comments:

HeadlineCharts said...

hi Bill, here is a quote for you

Aug-14, "With WLI growth surging, the odds are rising that the early stage of this economic recovery will be stronger than any since the early 1980s," said Lakshman Achuthan, Managing Director at ECRI.

Bill Luby said...

Great quote. Thanks for posting, HC.

While this doesn't necessarily surprise me, I have trouble with the idea that a sharp initial bounce necessarily translates in jump starting a durable economic recovery. It may indeed happen that way, but I don't think it is a given, particularly if housing prices continue to decline, the consumer continues to get squeezed, there are significant net job losses, etc.

It suspect it will be a great 12 months for opportunistic traders, but I fear for the buy and hold crowd.

Cheers,

-Bill

Jezzer said...

One way of trading the VIX that wasn't mentioned in the article was spread betting. Providers such as IGIndex offer a monthly spread bet where you can go long or short on the VIX.

Any suggestions on how to exploit this? I note that between April 9th and today, the Vix almost flatlined above 18 until the first week of May when it jumped almost to 45. I am wondering if there might be an opportunity here (with the Vix currently at 25 as I type, according to IGIndex) to place a buy with a stop loss at 18 and wait for the inevitable volatility in the coming weeks...thoughts?

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