Whatever you do, just ensure you backtest it extensively on a demo account and build consistency before you employ the strategy in a live account. 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 September 16, 2024. 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, also known as backwardation, meaning long-term holders will see a penalty to returns. While investors will often refer to VIX ETFs, in fact, the majority of tradable volatility derivatives are exchange-traded notes (ETNs).

On the other hand, when the VIX is rising, stock indices are falling, and investors may consider a risk-off mode. The uncertainty surrounding economic growth can also lead to increased stock market volatility. When investors are uncertain whether the economy will expand or contract, they tend to become more conservative with their investments. They may sell off stocks for safer investments such as bonds or cash to protect themselves from a potential downturn. The measure is a forward-looking indicator, reflecting expectations of future price swings rather than current prices.

Trading VIX with ETFs and ETNs

  • There are several options to buy the VIX index – through options, futures, ETFs, and CFDs.
  • When there’s a concern in the markets among economists and investors, the VIX is the first financial instrument to show that.
  • The VIX is a popular market volatility measure used for trading options.
  • Instead, they are collections of futures on the VIX that only roughly approximate the performance of the VIX.
  • With these guidelines in mind, you’re better equipped to explore the opportunities that volatility trading offers.

Another way to get out of the trade when in profit is to monitor when the EMA gives an opposing signal to the one you’ve entered. If the EMA signals a sell when you are in a bullish trade, exit your position. And if you were in a bearish trade when the EMA signals a buy, exit your position. Trading the VIX can be complex and may not be suited for all beginners. A thorough understanding of how volatility works is necessary before starting. The average price of crude oil can fluctuate due to political, geographical, and social circumstances.

Macroeconomic and Geopolitical Uncertainty

Whether for hedging or speculation, VIX futures contracts are a valuable tool for engaging with market volatility. Imagine you can trade the fear in financial markets, the concerns of investors, and speculate on the market sentiment. It’s an index that allows you to speculate on the mood in the markets. And, in some market scenarios, especially when there’s panic in the markets, it is the go-to asset for many investors and traders. Even if you select a high-liquidity option contract, we typically prefer limit orders to market orders when trading VIX options. A quick spike or dump in prices can come at any moment, and even the most liquid of VIX contracts can be the unfortunate bearer of a wide bid/ask spread.

Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. Market Rebellion is not giving investment advice, tax advice, legal advice, or other professional advice. On the other hand, Thinkorswim and Interactive Brokers do allow you to trade the VIX — both options and stock. If you can’t trade the VIX directly, you can trade a few VIX lookalikes, but we’ll get into that in a moment.

Frequently Asked Questions About the VIX Trading Strategy

  • Some traders use neural networks to forecast volatility surfaces or employ reinforcement learning algorithms to dynamically adjust trading strategies.
  • The VIX is often dubbed Wall Street’s “fear gauge” because it rises when investors are anxious and falls when optimism prevails.
  • It can also provide trading opportunities, with some traders using it to diversify their portfolio or others as an effective hedging tool.
  • 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.

Market Rebellion has a cornucopia of resources to help you understand those terms. Realizing the generally negative correlation between volatility and stock market performance, many investors have sought to use volatility instruments to hedge their portfolios. In this article, we’ll review four ways you can trade the VIX using specific exchange-traded funds (ETFs) and exchange-traded notes available via online brokers. Derived from the price inputs of S&P 500 index options, it provides a measure of market risk and investors’ sentiments regarding the future. The VIX how to trade the vix is also used by traders who want to make informed decisions about which stocks to buy and sell. When the VIX rises, this indicates that there’s more risk in the market—which means you may want to hold off on buying new stocks or selling your existing ones until things calm down again.

ProShares VIX Short-Term Futures ETF

The VIX, which is a measurement of volatility, can be traded through exchange-traded funds and notes that track volatility. Investors considering these ETFs and ETNs should realize that they are not proxies for the performance of the spot VIX. Some may rise or fall in tandem with the VIX, but the rate at which they move and the lag time can make pinpointing entry and exit points challenging even for seasoned traders. There is also an ETF for investors looking to play the other side of the volatility coin. Remember, the key to successful VIX trading lies in preparation, knowledge, and caution. With these guidelines in mind, you’re better equipped to explore the opportunities that volatility trading offers.

Our Favorite VIX Trading Strategy: How to Trade the VIX Like a Pro

These contracts add flexibility and opportunities for traders to respond to market volatility on a shorter time horizon. Comprehending the VIX Index requires an understanding of its calculation methodology. The VIX is derived from the weighted prices of S&P 500 index options, both puts and calls, with near-term expiration dates. By aggregating these option prices, the VIX estimates the expected volatility over the next 30 days. This forward-looking nature makes the VIX a valuable tool for predicting how the VIX index is calculated and can indicate market fluctuations.

Volatility ETFs and ETNs

If investors want to place bets on equity market volatility or use them as hedges, the VIX-related ETF and ETN products are acceptable but highly-flawed instruments. They do, however, have a strong convenience aspect to them, as they trade like any other stock. OTC leveraged products, including CFDs, are complex instruments and come with a high risk of losing money rapidly due to leverage. 61% of retail investor accounts lose money when trading CFDs with this provider.

Higher VIX values indicate greater expected market volatility and increased uncertainty, often leading to higher option premiums as demand for options increases. Conversely, lower VIX values suggest a calmer market with less anticipated price movement and low volatility. Understanding these dynamics allows traders to gauge market sentiment and adjust their strategies accordingly. 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.

Several firms have raised year-end equity targets (reflecting optimistic gains) but also warn of repeated volatility spikes on policy and geopolitical news. In short, if trade disputes and economic uncertainty simmer, VIX spikes are likely; if those risks ease, volatility should subside toward its historical norm (roughly the mid-teens to low-20s). (As an added bonus fact, the average VIX value since its inception is 19.54).

CBOE Volatility Index (VIX): what it is and how to trade

The second method is to trade VIX via ETFs (Exchange Traded Funds) or ETNs (Exchange Traded Notes). Once again, for that matter, you typically need to invest a large sum to be able to make substantial profits as a trader. This strategy doesn’t offer you trade entry signals but gives you useful insights into the market that you may not find anywhere else. Upon using this strategy, you should enter a bearish trade on the S&P 500 whenever the 20 EMA crosses the VIX to the downside. Conversely, enter a bullish trade on the S&P 500 whenever the 20 EMA crosses the VIX to the upside (as presented in the chart below). Because inverse ETFs can rack up significant losses quickly, they are designed for knowledgeable investors who carefully assess and manage their risks.

Below are the performance returns of the SVXY based on available time periods as of September 16th, 2024. Below are the performance returns of the VIXM based on available time periods as of September 16, 2024. Investors often use VIX-related products to hedge against their portfolios. Please note that past performance is not a reliable indicator of future results. The best choice among these depends on your specific goals and risk tolerance. It’s crucial to use appropriate position sizing and stop-loss orders, as volatility can sometimes trend for extended periods before reverting to the mean.