Volatility Index- VIX ETF

To understand the several VIX ETF options, one must first understand the VIX. The VIX is the CBOE volatility index, based on the S&P 500 options. It represents the S&P 500 index expectation of implied volatility. It is a representation of 30 days of expected market volatility data. In simple terms, the VIX measures investor fear, well known as the “fear gauge”. If the VIX spikes as it did in 2008, October reach an all-time intraday high of 96.40. As fear spikes or the stock market falls drastically, the VIX goes up. As the S&P 500 moves sideways or rises, VIX fear falls and the index falls.

There are several VIX ETF’s which represent the VIX and give traders and investors alike access to stock market volatility. Such as the VXXB that we previously covered, check out this article. There are several categories in which you can classify VIX ETF’s. One does not simply buy or sell the VIX but can buy options on VIX ETF’s such as our article mentions above or on the other hand get into VIX ETF futures. Like any futures contract, there is expiration and a trader would get into a long position with the assumption that price would go up at some point in the future. Alternatively, get into a short position with the assumption that price would drop at some point in the future.

Above is a chart of the S&P 500 compared to the VIX. The VIX (orange line) has a somewhat inverse correlation with the S&P 500. When fear increases, or the S&P 500 drops, the VIX spikes. VIX is a measure of investor fear in the stock market, so its no surprise that in February 2018 and December 2018 the VIX spiked on a massive S&P 500 selloff. Which is why, the VIX is considered a hedging mechanism against potential a drop in the stock market.

Investing in the VIX

Realistically, one cannot simply invest in the VIX, that is why there are both VIX ETF’s and inverse ETF’s. As we mentioned the most popular VIX is the VXXB while the most popular inverse VIX ETF is the XIV (VelocityShares Daily Inverse VIX Short-Term ETN). Below is a table which represents VIX ETF’s and inverse VIX ETF’s with their assets under management (AUM).

The inverse ETF is a thing of beauty when it comes to the VIX ETF trade. A favorable trade among hedge funds. Since VIX is usually skimming the lows, the inverse makes gains. There is a lot of opportunity in the VIX markets, but there should be caution. The VIX short is a favorable trade, but it turns south…fast.

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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.