How to trade vix futures

The one constant on the stock markets is change. Said differently, volatility is a constant companion to investors. Ever since the VIX Index was introduced, with futures and options following later, investors have had the option to trade this measurement of investor sentiment regarding future volatility. At the same time, realizing the generally negative correlation between volatility and stock market performance, many investors have looked to use volatility instruments to hedge their portfolios.

Unfortunately, it is not quite that simple and while investors have more alternatives than ever before, there are a lot of drawbacks to the entire class. Enhance your trading with the tools from today's top online brokers. A Flawed Starting Point? One significant factor in assessing exchange-traded funds ETFs and exchange-traded notes ETNs tied to VIX is VIX itself.

VIX is the ticker symbol that refers to the Chicago Board Options Exchange Market Volatility Index. While often presented as an indicator of stock market volatility and sometimes called the "Fear Index" that is not entirely accurate. This is not the Black Scholes modelin other words, and it really needs to be emphasized that the VIX is all about "implied" volatility.

What's more, while VIX is most often talked about on a spot basis, none of the ETFs or ETNs out there represent spot VIX volatility. Instead, they are collections of futures on the VIX that only roughly approximate the performance of VIX.

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. What's more, because volatility is a mean-reverting phenomenon, VXX often trades higher than it otherwise should during periods of low present volatility pricing in an expectation of increased volatility and lower during periods of high present volatility pricing a return to lower volatility.

VXZ is structurally similar to the VXX, but it holds positions in fourth, fifth, sixth and seventh month VIX futures. Accordingly, this is much more a measure of future volatility and it tends to be a much less volatile play on volatility.

This ETN typically has an average duration of around five months and that same negative how to trade vix futures yield applies how to trade vix futures - if the market is stable and volatility is low, the futures index will lose money. For investors looking for more risk, there are more highly leveraged alternatives. The VelocityShares Daily two-times VIX Short-Term ETN ARCA: TVIX does offer more leverage than the VXX, and that means higher returns when VIX moves up.

On the other hand, this ETN has the same negative roll yield problem plus nifty index options settlement volatility lag issue - in other words, this is an expensive position to buy-and-hold and even Credit Suisse 's NYSE: CS own product sheet on TVIX states "if you hold your ETN as a long-term investment, it is likely that you will lose all or a substantial portion of your forex trading xls. Dissecting Leveraged ETF Returns Nevertheless, there are also ETFs and ETNs for investors looking to play the other side of the volatility coin.

XXV basically looks to replicate the performance of shorting the VXX, while the VelocityShares Daily Inverse VIX Short-Term ETN ARCA: XIV likewise seeks to deliver the performance of going short a weighted average maturity of one month VIX futures. Beware the Lag Investors considering these ETFs and ETNs should realize that they are not great proxies for stockton flea market wilson way performance of the spot VIX.

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SPY and the changes in the spot VIX, the one-month ETN proxies captured about one-quarter to one-half of the daily VIX moves, while the mid-term products did even worse. The TVIX, with its two-times leverage, did better matching about half to three-quarters of the performancebut consistently provided less than fully two-times the performance of the regular one-month instrument.

Moreover, because of the negative roll and volatility lag in that ETN, holding on free paper trade binary options long after the periods of volatility started to significantly erode returns. The Bottom Line If investors really 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 certainly have a strong convenience aspect to them, as they trade like any other stock. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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How to Trade the VIX; Profit From Volatility - Barron's

Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. Introducing The VIX Options Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free! Learn the best ways to profit and hedge using the Chicago Board Options Exchange Market Volatility Index.

Volatility funds offer exposure to high greed and fear levels while avoiding predictions on price direction. Discover how the VIX Index, or "fear gauge," began above the historical mean, and learn how this relates to past spikes in volatility. The CBOE's Volatility Index has been at lows since February.

The CBOE Volatility Index hit its lowest level since on March The low at These two exchange-traded products offer exposure to short-term VIX futures, but have a different degree of credit risk. The most popular volatility index is at its lowest point in history, but a lesser known measure of volatility is hinting that might change soon. Stock volatility has plummeted, causing volatility ETFs to crash in value. A fund that's up nearly percent in the last five years. Find out why investors and analysts use the Chicago Board Options Exchange Volatility Index, or VIX, to measure the market's Learn the most commonly used technical indicators of stock market volatility that are watched by stock market traders and Learn what the relationship is between implied volatility and the volatility skew, and see how implied volatility impacts No thanks, I prefer not making money.

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