Volatility / Vix Trading: Your Step-by-Step Guide to Stock Trading and Options Trading with Volatility

Author:Briones, Raymundo [Briones, Raymundo]
Language: eng
Format: mobi
Published: 2014-06-17T23:00:00+00:00

Chapter 4 – How to Trade the VIX

When can the VIX be considered low? Normally when it’s located below 15, it’s a good time to play the VIX.

In fact, when the VIX is as low as 15, the markets have grown so much that they are ready to go down at a certain point as it’s likely that they have reached a peak. This will certainly happen but it’s difficult to predict when.

When the VIX is low, in order to trade in the simplest way, you need to consider the VIX futures- exchange traded notes (ETN) and exchange traded funds (ETF) such as the iPath S&P 500 VIX Short-Term Futures ETN ( NYSE: VXX) or the S&P VIX Mid-Term Futures ETN (NYSE: VXZ).

Why are we trading them? The ETFs and ETNs are cheaper and the futures can be a good guideline for what the market directions might be. If you buy at a cheaper price, your risk is lower in terms of potential loss, but your profits, although somewhat protected, could also be more limited.

You should be protected when the bullish period is over or when some economic news might cause a slowdown.The VIX will start to grow, and the VXX and the VXZ with it.

If you buy puts when the VIX is low, it’s like betting that the market is almost near the top and will probably go down. Since the VIX movements are the opposite of the S&P 500 index, when the VIX is going up, it is most likely that the S&P 500 will start dropping.

Another option is to buy leverage inverse ETFs - such asProSharesUltraPro S&P 500 (NYSE: UPRO) or ProSharesUltraShort S&P 500 (NYSE: SDS). These ETFs will allow you to make profits even when the markets are dropping.

Although the VIX is a stock market volatility index, you need to understand that it’s not that different from any other investment tool.It can change in response to the news, announcements,economic data and dynamic market expectations.

When you invest in a VIX-linked product, in fact, you should keep in mind that it is a short-term investment and carries consequent risks. This means you should act fast and not wait too long when it comes to making investment decisions.

The most important thing you need to consider is that you cannot use the VIX by itself: you need to use it together with the S&P 500 index.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.