How to trade vix options

A Trader Called the ‘VIX Elephant’ Is About to Rock Volatility Options. Derivatives traders should brace themselves for massive volumes in volatility-linked options. An options behemoth that’s been betting on a modest rise of the Cboe’s VIX index -- and traded 3.15 million contracts so far this year -- may roll over a huge position today or later this week based on trading patterns going back to July, Pravit Chintawongvanich, head of derivatives method at Macro Risk Advisors, wrote in a note. Rolling the trade over -- closing the old legs and refreshing the new ones -- would likely include more than 2 million contracts, around three times the average daily volume of VIX options, according to Cboe data of the past 20 sessions. The trader, who਌hintawongvanich has dubbed the “VIX Elephant,” shorted 262,500 December VIX puts with a strike price of 12 and is long a VIX call spread that profits if December futures contracts expire between 15 and 25 -- selling 525,000 VIX calls with a strike price of 25 and purchasing 262,500 VIX calls with a strike price of 15. The November VIX futures contract expired Nov. 15. More than halfway through Monday’s session, there has yet to be any unusual activity in the aforementioned options, with less than 10,000 VIX December puts with a strike price of 12 changing hands as of 1:30 p. m. Chintawongvanich reckons the looming unwind and reapplication of this trade is one of many factors applying pressure on December VIX futures. Earlier this year, the strategist alerted the investing world to the volatility buyer known as � Cent,” given his penchant for buying near-dated VIX options priced at about $0.50. How to trade vix options Turn Volatility to Your Advantage. Cboe Volatility Index® (VIX®) Options and Futures help you turn volatility to your advantage. Harness it to seek diversification, hedge or capitalize on volatility or efficiently generate income. Seek to capitalize on upward and downward market moves. Cboe Global Markets. 400 South LaSalle St. Chicago, IL 60605. TAKE ADVANTAGE OF VOLATILITY. Help protect a portfolio against downward moves in the market.

With its high negative correlation to the broad market, efficiently seek diversification. Cboe Weeklys Options and Futures have the Power of More. More targeted trading strategies. More expirations. More opportunities. Trade VIX®, SPX and RUT Weeklys Options and Futures. Hedge the volatility of a stock portfolio to help reduce the risk or increase risk-adjusted returns. VIX Options and Futures give you the opportunity to protect against or capitalize on volatility to stay ahead of where the market is going. Watch Now to Learn about Trading VIX. Learn how to use options and futures based on the VIX to turn volatility to your advantage. Tools for Trading. Now that you're familiar with VIX Options and Futures, see how you can add them to your portfolio with Cboe trading tools.

Practice trading VIX with this free tool &ndash and experiment with new advanced strategies without risk to your portfolio. See the most recent market quotes for VIX. And monitor the market from one easy-to-use page with features including a market scanner, most active stocks, options and futures, news and more. Content provided by third party Twitter® users - Cboe does not screen, control, monitor or endorse such content which solely represents the views of such users. Want to know the latest happening in volatility and VIX Options and Futures? Join the conversation with $VIX on Twitter. Did you know you can trade VIX Futures nearly 24 hours a day, 5 days a week and VIX Options 13 hours a day, 5 days a week? 4 Ways To Trade The VIX. 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. A Flawed Starting Point? VIX is a weighted mix of the prices for a blend of S&P 500 index options, from which implied volatility is derived. In plain(er) English, VIX really measures how much people are willing pay to buy or sell the S&P 500, with the more they are willing pay suggesting more uncertainty. This is not the Black Scholes model, in other words, and it really needs to be emphasized that the VIX is all about "implied" volatility. A Host of Choices. The iPath S&P 500 VIX Mid-Term Futures ETN (ARCA: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 roll yield applies here - 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 a 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 investment." The Bottom Line. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free! Introducing The VIX Options. Trading volatility is nothing new for option traders. Most option traders rely heavily on volatility information to choose their trades. For this reason, the Chicago Board Options Exchange (CBOE) Volatility Index , more commonly known by its ticker symbol VIX, has been a popular trading tool for option and equity traders since its introduction in 1993. Until recently, traders used regular equity or index options to trade volatility, but many quickly realized that this was not the best method. On Feb. 24, 2006, the CBOE rolled out options on the VIX, giving investors a direct and effective way to use volatility.

In this article, we take a look at the past performance of the VIX and discuss the advantages offered by the VIX options. See: Determining Market Direction With VIX. One advantage of the VIX is its negative correlation with the S&P 500. According to the CBOE's own website, since 1990 the VIX has moved opposite the S&P 500 Index (SPX) 88% of the time. On average, VIX has risen 16.8% on days when SPX fell 3% or more. This makes it an excellent diversification tool and perhaps the best market disaster insurance. Buying VIX calls seems to be an even better hedge against drops in the market (S&P) than buying SPX puts. The chart in Figure 1 shows how the VIX moves in opposition to the SPX in big moves down in the SPX. In 2008, the VIX reached its highest close at 80.86. This makes the new VIX options excellent speculation instruments as well. Buying calls (or bull call spreads , or selling bull put spreads ) when the VIX bottoms out can help a trader capitalize on moves up in volatility, or down in the S&P 500. Similarly, buying puts (or bear put spreads, or selling bear call spreads) can help a trader capitalize on moves in the other direction. Another factor enhancing the effectiveness of VIX options for speculators is their volatility.

According to the CBOE, the volatility for the VIX itself was more than 80% for 2005, compared to about 10% for SPX, 14% for the Nasdaq 100 Index (NDX) and about 32% for Google. The value of the options is not direct from the "spot" VIX, rather, it is the forward value using current and next month options volatility for the forward VIX is lower than that of the spot VIX (about 46% for 2005). However, this is still higher than most stock options out there. An instrument that trades within a range, cannot go to zero and has high volatility, can provide outstanding trading opportunities. how+to+trade+vix+options. Narrow Your Search. Tech Culture (10343) Tech Industry (7022) Internet (3948) Mobile (3830) Phones (1570) Security (1157) Software (1121) Sci-Tech (1050) Gaming (823) Computers (776) Smart Home (626) Applications (618) Gadgets (562) Auto Tech (505) Mobile Apps (455) How to record phone calls. Remember the story about the guy who recorded a hilariously horrific customer-service call with Comcast? If I was on the receiving end of such disastrously bad service, I'd want audio proof as. By Rick Broida 05 April 2017. How to watch the Masters 2017. Jason CiprianiCNET Later this week, the world's best golfers will vie for the honor to wear the coveted green jacket at the Masters.

You have a few different options to watch an entire weekend. By Jason Cipriani 03 April 2017. How to set up a backup phone. Enlarge Image Josh MillerCNET Well, it happened. Your phone is lost. Or broken. Maybe even stolen. And because your entire life is contained in that thing, now you've got problems. Your. By Rick Broida 04 April 2017. How to make pod coffee cheaper. My-Cap When my Aeropress broke recently and I was jonesing for my morning shot of espresso, I bought a Nespresso Vertuoline espresso maker. It was on sale and makes great coffee, but I quickly.

By Richard Baguley 07 April 2017. How to look like a big business. In 1999, Rob Cheng left a comfortable job heading up sales, marketing and support at Gateway, one of the biggest PC makers of the era, to open his own company. The idea -- a website offering an. By Charles Cooper 29 March 2017. How to connect Lifx bulbs to Google Home. Google has been slowly closing the gap between what Amazon's Alexa speakers and its own Google Home are capable of. Among other small additions along the way, since its launch in November, Google. By Taylor Martin 28 March 2017. How to switch from iPhone to Samsung. Evan BlassTwitter Are you ready to give Samsung another shot after last year's exploding Galaxy Note 7 scandal? The troubled electronics giant is set to release its next flagship phone, the. By Matt Elliott 22 March 2017. How to recycle old appliances (with little to no effort) Taylor MartinCNET Landfills take up space, add to the greenhouse gasses in the atmosphere and they smell awful. Plus, they will only get bigger if your old refrigerator, oven or washer get sent.

By Alina Bradford 02 April 2017. How to use a Chromebook: Tips, tricks and shortcuts. Kicking the tires on a Chromebook purchase? As a cheaper alternative to a Windows laptop or a MacBook, a Chromebook is an attractive option for budget buyers. The simplicity of Google's Chrome OS. By Matt Elliott 07 April 2017. How to make a good movie even better. For the past several weeks I've been sharing my favorite YouTube channels because I want people to know there's way more to Google's video site than the stuff most people search for. Today, I. By Jason Parker 30 March 2017. © CBS Interactive Inc. All Rights Reserved. How to trade vix options If you want to trade options on fear I’ve listed some things below that you should know. If you are interested in other volatility investments besides options see 󈫺 Top Questions About Volatility“.

Regarding VIX options: Your brokerage account needs to be a margin account, and you need to sign up for options trading. There are various levels of option trading available (e. g., the first level allows covered calls). My experience is that to trade VIX options you will need to be authorized to trade at the second level. These levels vary from brokerage to brokerage, so you will have to ask what is required to be long VIX options. If you are just getting into options trading this is as high as you want to go anyway. Selling naked calls for example, is not something for a rookie to try. No special permissions are required from your broker for VIX options. In general, the same sort of restrictions (e. g., selling naked calls) that apply to your equity option trading will apply here. Calendar spreads aren’t allowed (at least within my account, with my level of trading). The software didn’t prevent my entering the order, but the order was canceled once I entered it and I got a call from the broker—ok, what did I do now? The reason for this restriction is because VIX options with different expirations don’t track each other well. More on that later.

The option greeks for VIX options (e. g. Implied Volatility, Delta, Gamma) shown by most brokers are wrong (LIVEVOL and Scwhab are notable exceptions). Most options chains that brokers provide assume the VIX index is the underlying security for the options, in reality, the appropriate volatility future contract should be used as the underlying. (e. g., for May options the May VIX futures are the underlying). To compute reasonably accurate greeks yourself go to this post. While technically not the actual underlying, VIX futures act as if they were the underlying for VIX options—the options prices do not closely track the VIX. A big VIX spike will be underrepresented, and likewise, a big drop probably will not be closely tracked. This is a huge deal. It is very frustrating to predict the behavior of the market, and not be able to cash in on it. The only time the VIX options and VIX are guaranteed to sort-of match is on the morning of expiration—and even then they can be different by a couple of percent. The closer the VIX future and the associated VIX option are to expiration, the closer they will track the VIX. With the CBOE’s introduction of VIX weekly options there should always be options available with less than a week to expiration.

The following chart from the CBOE shows the typical relationship. The VIX options are European exercise. That means you can’t exercise them until the day they expire. There is no effective limit on how low or high the prices can go on the VIX options until the exercise day. Expiring In-the-Money VIX options give a cash payout. The payout is determined by the difference between the strike price and the VRO quotation on the expiration day. For example, the payout would be $1.42 if the strike price of your call option was $15 and the VRO was $16.42. The expiration or “print” amount when VIX options expire is given under the ^VRO symbol (Yahoo) or $VRO (Schwab). This is the expiration value, not the opening cash VIX on the Wednesday morning of expiration. VIX options expire at market open on expiration day, so expiring options are not tradeable during regular hours on that day. VIX options do not expire on the same days as equity options. It is almost always on a Wednesday See this post for upcoming expirations.

This odd timing is driven by the needs of a straightforward settlement process. On the expiration Wednesday the only SPX options used in the VIX calculation are the ones that expire in exactly 30 days. For more on this process see Calculating the VIX—the easy part. The bid-ask spreads on VIX options tend to be wide. I have always been able to do better than the published bid ask prices– always use limit orders. If you have time start halfway between the bid-ask and increment your way towards the more expensive side for you. I don’t recommend you start trading options on VIX if you aren’t an experienced option trader. If you are a newbie trade something sane like SPY options first… The VIX is not like a stock, it naturally declines from peaks. This means its IV will always decline over time. As a result VIX options will often have lower IVs for longer term options—not something you see often with equities. The CBOE reports that trading hours are: 9:30am to 4:15pm Eastern time, but in reality the options do not trade until after the first VIX “print”-when the VIX value in calculated from the first SPX options transactions. The first VIX quote of the day is usually at least a minute after opening. That is good info. Thanks…that is seriously good to know… Hey wow I really like your article because it explains everything in great detail.

I’ve been dying to invest in trading options but I was scared since I’m just new to all this. I’ve been searching the web for some helpful tips and advice such as on amazon. comdpB00JFB3V7Oie=UTF8?m=ADE61CS5ZCK11&keywords=&tag=cfx02-20. Well but when I came across your blog I felt so much more confident because your article seems so simple and easy. Thanks a lot for sharing. Great post. You might also find this interesting – Top 6 Reasons to Trade Volatility vixstrategies. comtop-6-reasons-to-trade-volatility-2 To clarify in regards to exercising the options, once you go long a call, the only time you can get out of it is at expiration? You couldn’t sell the call prior to expiration? Hi Felix, You can always sell the call whenever the market is open, exercising is restricted to only happen at expiration.

In practice I don’t see any benefit to exercising VIX options, the option is either in or out of the money at expiration and if in the money the holder will get the cash difference from the strike price. With American style options there is the ability to exercise early and there are sometimes times when it makes economic sense to do that, primarily associated with dividends, or possibly with mis-pricing. “Because the underlying for VIX options is the futures contract, the options prices do not track the VIX particularly well” Techinally this isn’t correct. The underlying for the options IS is the vix index and the SOQ calculated based on the same SPX options that are used to calculate the VIX index also. The reason the options seem to track the futures and not the index, is the european style exercise – the options behave as they were american style options with the futures as the underlying, but they actually are european style options with the index as the underlying. In practise this doesn’t make much difference because on settlement date the values are the same, but if for some impossible reason the index and futures would differ on settlement, the official options exercise price would be the SOQ of the Index, not the price of the futures contract. Hi Markus, I agree that VIX futures are not the actual underlying of VIX options and I have modifed the post to that effect. However, I don’t agree that the VIX is the underlying. As you mention, the actual settlement uses the SOQ calculation on a set of SPX options. These options form a 30 day forward log contract variance swap priced in volatility points. If VIX options settled to the spot VIX there wouldn’t be a typical difference, sometimes of several percentage points with the VIX opening price. The reality is that VIX Futures act as if they were the underlying of the appropriate vix options series (e. g, satisfying put call parity) and VIX futures are key enablers for the existence of VIX options because the market makers use VIX futures to hedge their VIX options positions. Explaining everyday VIX option pricing with respect to VIX futures is straightforward–trying to explain it in terms of the VIX spot is impossible. In regards to point #10…the bidask spread: how often would you say that you got filled better?

For example, as I am typing this, calls for next month at the 15 strike are quoted at 1.00 x 1.10. If I joined the bid, what are the chances that someone hits me there…and if I placed a limit order at say 1.05, what are the chances I would get filled there? I understand its not an absolute science but any experience you could relay would be great. Vance, I have been reading your blog for some time and I find it one of the most interesting source of information on volatility products. I hope your read the comments to older posts, because I have a question. You mentioned often that the true underlying of VIX option is the corresponding future contract instead of the index itself while I intuitively agree with you, I could not find any technical discussion of the point (besides your considerations on put-call parity). Did I miss something? Is there anything I can read to get a better understanding of the issue? Hi Andrea, Technically VIX futures are not the underlying of VIX options–but using the appropriate VIX future you do get a much more accurate picture of the greeks and the option’s premium. Since VIX options do not allow early exercise and are cash settled the whole concept of an underlying is not really necessary. To be really technical, the pricing bedrock for VIX options and futures is a 30 day variance forward variance priced in volatility points. That’s probably not useful, but it’s my best shot at accuracy. These variance forwards swaps consist of “strips”, lots of SPX options at different strikes that together give a variance that’s not very sensitive to the absolute value of their underlying (the SPX). The square root of variance is volatility.

There’s some more subtleties, but I doubt they would be helpful. Hi Vance, thanks for your prompt reply. I used to trade interest rate and equity derivatives (actually, I was in charge of financial product engineering at a major Italian bank) around 20 years ago, but I never had the opportunity to trade volatility products. I was wondering the same thing.. You sir have answered many of my questions with that single post. Thank you very much. Are you talking about VIX index options or VIX futures options? how+to+trade+vix+options. Narrow Your Search. Tech Culture (10343) Tech Industry (7022) Internet (3948) Mobile (3830) Phones (1570) Security (1157) Software (1121) Sci-Tech (1050) Gaming (823) Computers (776) Smart Home (626) Applications (618) Gadgets (562) Auto Tech (505) Mobile Apps (455) How to record phone calls. Remember the story about the guy who recorded a hilariously horrific customer-service call with Comcast? If I was on the receiving end of such disastrously bad service, I'd want audio proof as. By Rick Broida 05 April 2017. How to watch the Masters 2017.

Jason CiprianiCNET Later this week, the world's best golfers will vie for the honor to wear the coveted green jacket at the Masters. You have a few different options to watch an entire weekend. By Jason Cipriani 03 April 2017. How to set up a backup phone. Enlarge Image Josh MillerCNET Well, it happened. Your phone is lost. Or broken. Maybe even stolen. And because your entire life is contained in that thing, now you've got problems. Your. By Rick Broida 04 April 2017. How to make pod coffee cheaper. My-Cap When my Aeropress broke recently and I was jonesing for my morning shot of espresso, I bought a Nespresso Vertuoline espresso maker.

It was on sale and makes great coffee, but I quickly. By Richard Baguley 07 April 2017. How to look like a big business. In 1999, Rob Cheng left a comfortable job heading up sales, marketing and support at Gateway, one of the biggest PC makers of the era, to open his own company. The idea -- a website offering an. By Charles Cooper 29 March 2017. How to connect Lifx bulbs to Google Home. Google has been slowly closing the gap between what Amazon's Alexa speakers and its own Google Home are capable of. Among other small additions along the way, since its launch in November, Google. By Taylor Martin 28 March 2017. How to switch from iPhone to Samsung. Evan BlassTwitter Are you ready to give Samsung another shot after last year's exploding Galaxy Note 7 scandal? The troubled electronics giant is set to release its next flagship phone, the.

By Matt Elliott 22 March 2017. How to recycle old appliances (with little to no effort) Taylor MartinCNET Landfills take up space, add to the greenhouse gasses in the atmosphere and they smell awful. Plus, they will only get bigger if your old refrigerator, oven or washer get sent. By Alina Bradford 02 April 2017. How to use a Chromebook: Tips, tricks and shortcuts. Kicking the tires on a Chromebook purchase? As a cheaper alternative to a Windows laptop or a MacBook, a Chromebook is an attractive option for budget buyers. The simplicity of Google's Chrome OS. By Matt Elliott 07 April 2017. How to make a good movie even better. For the past several weeks I've been sharing my favorite YouTube channels because I want people to know there's way more to Google's video site than the stuff most people search for. Today, I. By Jason Parker 30 March 2017. © CBS Interactive Inc.

All Rights Reserved. How to trade vix options Unlike the S&P 500 or Dow Jones Industrial Index, there’s no way to directly invest in the CBOE’s VIX® index. Some really smart people have tried to figure out a way, but there’s just no way to do it directly with something like a VIX index fund. Instead, you have to invest in a security that attempts to track VIX. None of them do a great job. The rest of this post discusses going long on volatility — if you think volatility is going to go down see Going Short on the VIX. For the average investor there are five ways to go long on VIX: Buy a leveraged exchange traded product (ETP) that tends to track the daily percentage moves of the VIX index. The best of these from a short term tracking standpoint are ProShares’ UVXY and VelocityShares’ TVIX. Buy Barclays’ VXX (short term), VXZ (medium term) Exchange Traded Note (ETN) or one of their competitors that have jumped into this market. Volatility tickers gives investors a full list of volatility ETNETFs. For more information on VXX see How Does VXX Work?

Buy VXX or VXZ call options ( ProShares’ VIXY and VIXM have options also) Buy UVXY options (2X leveraged version of the short term rolling futures index used by VXX) Buy VIX call options short VIX put options (Thirteen Things You Should Know about VIX Options. The first two choices are not for the faint of heart. VIX’s moves are often extreme, so if you bet wrong you can lose money in a big hurry (think 15% or more in a 24 hour period), of course, there is the equivalent upside if you get it right. In my opinion, these are tools for day traders that stay stuck to their screens and have an excellent sense for market direction. Unless the market is in a sustained high fear mode (e. g., Aug 2011 through Oct 2011) these funds will often erode dramatically over a multi-day period. But if you are looking for the best ETNETF to track the VIX short term moves this is as good as it gets. Unlike TVIX, ProShares’ UVXY, is an Exchange Traded Fund (ETF), not the more typical ETN. The good news is that the financial backing of an ETF, unlike an ETN is not dependent on the credit worthiness of the provider because they are guaranteed to be backed by the appropriate futuresswaps. The bad news is that those futures change the tax status of the fund to be a partnership—which requires filing a K1 form with your tax returns. Typically this is not a big deal, but requires a little extra work. While these funds do a respectable job of tracking the VIX on a daily basis they will not track it one to one. These funds are constructed using VIX volatility futures that aren’t constrained to follow the VIX—sometimes they are lower than the VIX, sometimes higher.

The VIX index tends to drop on Fridays and rise on Mondays due to holiday effects in the SPX options underlying the VIX—the VIX futures don’t track these moves and hence the ETPs don’t track them either. The second choice, buying non-leveraged volatility ETNs like VXX, is not as twitchy, but be aware that the VXX will definitely lag the VIX index (think molasses), and it is also not suitable as a long-term holding due to the fact that the VIX futures that the fund tracks are usually decreasing in value over time. This drag, called roll loss occurs when the futures are in contango. It usually extracts 5% to 10% a month out of VXX’s price. Proshares has an ETF version, VIXY, that tracks the same index as VXX—if you’d rather use an ETF for playing the VIX this way. Relatively new on the scene, trading since May 2016 is REX ETFs VMAX fund. It tracks the VIX better than VXX with significantly less roll loss than the 2X leveraged funds. For more on this fund see this post. Volatility Funds vs the VIX. The chart below shows how VXX’s price has fared relative to the VIX. The VIX is a range bound index (scale on the right side of chart) that stays between around 9 and 80, whereas VXX erodes over time and must be reverse split to keep its price in a reasonable trading range. On this scale, you can see that VXX “tracks” the VIX only in the loosest sense. Given its dismal track record, it’s surprising that VXX usually trades over 50 million shares a day.

I think the allure comes from its reliable negative correlation with the equity markets (-3x). If SPY has a significant down day, you can be pretty confident VXX will have a good day—unlike some investments like gold. On June 1st, 2010 options on VXX were introduced and became almost immediately successful. I think retail investors flocked to them because they lacked most of the VIX option eccentricities—such as European exercise, different expiration dates, VRO based settlement values, and Greeks that are generally wrong. VXX options have VXX as the underlying, which avoids the perpetual confusion associated with VIX options where volatility futures behave much more like the underlying than the VIX. VXX weekly options are also available. UVXY options are quite expensive due to the volatility of the ETF, but if want to increase your leverage, or reduce your capital exposure they are a possibility. The bid ask spreads can be wide. Never pay what is offered, use limit orders and split the bidask prices (e. g., if the spread is 3.403.80 and you want to buy, offer 3.60 or 3.70 with a limit order.) More on trading VIX options here. The VIX options are European exercise, unlike most equity options—practically this means the VIX options will predictably match (approximately) the VIX index, only once a month—the moment they expire.

The posted greeks (delta, gamma, etc.,) are almost always wrong. See more here. Like all options, their premium value erodes with time, especially as you approach expiration. If you want to trade the VIX you are probably hoping to speculate on its big swings, or you are trying to hedge your portfolio against big, sharp declines. If you want to speculate, be prepared to move in a hurry—the VIX drops quickly once the market angst subsides. Most of the action is over in a few days. If you want to hedge over the longer term I’d avoid these securities and look at the longer term method funds described next. There are two basic volatility method categories, one grouping is funds intended as portfolio solutions that combine equities (S&P500) and a volatility hedge. These are represented by Barclays’ VQT, PowerShares’ PHDG, and VelocityShares SPXH & TRSK. The other group is a straight volatility play, but with a design that attempts to minimize losses when the market is quiet. Examples of this group are VelocityShares’ BSWN & LSVX and Barclays’ XVZ. The downside of these volatility method funds are that they sometimes decay anyway, they don’t respond quickly to fast volatility events like overnight scares or flash crashes, and they don’t track daily VIX moves all that well. However, both groups of volatility method funds should do very well in bear market scenarios, taking advantage of the strong backwardation in VIX futures that occurs during panicky times.

Bottom line, it’s very tempting to try and guess when the VIX will spike, but in practice, most people don’t get the timing right. If you buy options or ETPs and UVXY or VXX you will likely see your money wither away. Consider the volatility method funds that I discuss towards the end of this post—they don’t require hair-trigger timing and they should do very well when a true bear market arrives. I would say the best option if you want to go long S&P volatility is a near-term delta-neutral straddle as opposed to VXX tracking errors andor going long VIX futures options. I'm delighted to see someone else who is interested in the VIX and volatility — and has some excellent content on the subject. I am with Charlie in that the best way for a retail investor to assemble a pure play on S&P volatility is with a straddle on the SPX or SPY. Here an investor also has the benefit of a favorable bidask spread and liquidity. The next best choice is probably VIX futures, from which, as you point out VXX and VIX options (for all practical purposes) are derived. As an aside, you may want to check your data source on VXX to make sure you have data going back to the 13009 launch. Cheers and welcome to the blogosphere, what does the stock price differential between VXX and VXZ tell you about the term structure of vol? Early 2009 both ETNs were priced above 100 and now a big difference. Has vol curve really steepened that much?

Would you view those as good vehicles for playing a flattening, or steepening, of vol curve? Thanks for the correction on the beginnings of the VXXVXZ ETNs. I have corrected the post to reflect the January 2009 launch. The vol curve is not something that I follow directly. Bill at vixandmore. blogspot. com is a better resource. As a longer term investment VXX has shown that it doesn't track the VIX index short term volatility metric particularly well. Their methodology requires them to roll over from current month to next month volatility futures on a daily basis–which hurts them if the next month futures are valued higher than the present month (“in contango” in futures terminology)–which seems to the be the typical case. VXZ is not very popular (only $30M in assets compared to $704M for VXX), so I suspect the bidask spreads are wide. I didn't realized this was your new blog.

Anyway I like the new look and feel and have replaced the old blog with the new one on my blogroll. Hoping seven or eight figure investing is just around the corner, Thanks for the feedback. I’m hoping to learn more about SEO, and my son, who is a web designer informed me that WordPress was the way to go. It was a significant learning curve, I hope it’s worth it. Thanks for the bogroll mention, I really appreciate it. Is trading the Vix like trading a stock or does it expire like an option. Hi Sam, I assume your question relates to the VXX, because you can’t directly trade the VIX itself. The VXX doesn’t expire, so in that sense it is like a stock. However the VXX will never behave like a good growth stock with the prospect of growth every year. Instead it is fated to bounce between two levels, one established by elevated volatility, and the other established by the moderate movements of a quiet market. In fact, its long haul prospects are even worse than that–because its sponsors must continually roll over the futures contracts it’s based on there is a structural erosion factor built into the VXX. Over the long run (multiple months) the VXX will always go down. For that reason I don’t consider the VXX a buy-and-hold candidate. You should only buy it when you think the market it going to fall sometime in the near future. You can’t trade the VIX directly. You can trade VIX options, which are based on VIX futures, or VXX VXZ and their options–which are based on a two month rolling mix of VIX futures.

See my “popular posts” section on the right side of my blog for more info. the best way to hedge a long portfolio is holding etfs that pay good dividends and reinvesting when it hits the bargain basement. When you have almost 13 million shares of SPY we are going to be PAID no matter what the market does. I strongly disagree on CVOL. Yes, it is thinly traded but spikes heavily at times of uncertainty. It may trade 25,000 in a day then trade 200,000 a week later. I like it much more than VXX which is not as volitile. I think VIX ix going to 50-60 in early 2013 and CVOL will spike more than any other VIX trade and at a much higher % than VXX. Hi, I hadn’t looked at CVOL in a while. I agree the volumes are respectable and the spreads aren’t too bad. The contango losses are bad, but much better than TVIX UVXY.

I’ve changed my post to put CVOL equivalent to UVXY. However medium to Long term I think CVOL will go away. Citigroup should have reverse split it by now if they plan to go with it long term. With only $6 million in assets they will probably let it fade away delist. It will probably take a year for that to play out. Hello Vance. You say that contango extracts 5-10% from VXX. Should we expect that decay to exist in the long term? I’m considering buying SVXY shares and just hold them “forever” to profit from VIX futures contango. Hi Vedast, The big problem is volatility spikes. You could easily see 50%+ of the value of your position vanish in a few days. Yes, eventually it will probably recover, but it might take years.

Not many people can stomach that big of a drawdown without pulling out. Using a ratio like VIXVXV to manage your position would probably help some, e. g., my backtest for XIV, stay in if the ratio is less than 0.917 limited the drawdown to “only” 25%. Hello Vance. Thank you for your reply. I realize that volatility can be really high, and I’d try to compensate that with other parts of my portfolio. Do you think that the monthly expected returns in the long run are as high as 5%-10% per month (minus VXX and SVXY annual fees)? I wouldn’t care dealing with big drawdowns if I have that kind of expected returns 🙂 HI Vedast, Using 28Dec11 through 28Dec12 the VIX was only down 7% for the year, but XIV’s monthly CAGR was +7.5%. This was a quiet period, but it shows what a contango powered period is capable of. By the way, I expect 2013 to be a more volatile year than 2012–maybe something like 2007. can i hold uxvy for long term, say 12 month or longer. Historically UVXY declines around 90% a year, so holding onto it for that long would almost certainly be a bad idea. Thank you for reply my question. So what make it declines 90% a year, is that all ETF is not for long term holding. for example like NUGT, DUST. Hi Benson, Most ETFs are ok for long term holding. The problem in general with leveraged ETFs (e. g, 2X and 3x) is compounding loss (see finance.

yahoo. comnews7-mistakes-avoid-trading-leveraged-130053722.html). TVIX has an additional problem, negative roll yield. For more see this post. vixandmore. blogspot. com201202four-key-drivers-of-price-of-tvix. html. What are your thoughts about profiting from the tracking errors in VXX as well as the contango that it experiences.

For example, buying a Feb 22 ATM VXX put while simultaneously buying a Feb 19 ATM VIX call. Even if VIX does experience a large spike, the VXX put would be minimally affected on the downside and the VIX call would fully realize the spike. This would work especially well if the spike only lasted for a few days, which it seems to usually do. Additionally, if it does turn out to be a long-term spike, the profit from the VIX call would more than likely surpass the premium paid for the VXX put. Thank you for the article and your time. Hi Adam, Using 31-Dec numbers your ATM put S42 would cost around 2.94 (VXX at 42.5) and your ATM call (S14) around .83. To get a 50% profit on the position you would need VXX to drop about 13% in the next 8 weeks. Not a bad bet, but any significant volatility uptick in the interim would derail the put. If volatility goes up you would need VIX to go up to around 18 to breakeven. Again not impossible, but a significant move. Don’t know what tracking error on VXX you’re referring to. It doesn’t track the VIX particularly well, but that’s because of lethargic VIX futures and contango. VXX tracks its index very well. Hopefully you know that the VIX Call will not track the VIX, but rather the Feb VIX futures. –Best Regards, Vance. Hi Vance, glad to see people out there also interested in VIX.

As I am new to VIX, I have a probably obvious technical question regarding selling call options of VIX: what happens if the call options are ITM upon expiry? Will the options be exercised? If this is the case, what exactly would I be selling since VIX cannot be directly invested? At the moment the best of these from a short term tracking standpoint is ProShares’ UXVY and… You need to correct the symbol in your text. UVXY is the correct symbol. is there any chance TVIX to go 20 again ? Is there any chance TVIX to go 20 again ? It would take a 2008 style crash get it that high, any chance JNUG to trade 300 again ? It would take a massive rally in Gold. I’d say no. Compared to their respective lows in mid Dec 2015, VXX is up about 17.5%, and $VIX about 16.5%, at today’s close.

From your excellent discussion, this implies that F1 and F2 have been in backwardation during this time, rather than the much more typical contango. Considering that $VIX has been declining since Jan 20, this seems especially significant. How do you understand this change, and what factors do you think would sustain or curtail it ? for the record, the referenced close is 2016-03-15. The VIX futures were slow to move back into contango, even though the VIX was declining. Watching the behavior of the VIX (reflecting SPX option premiums) vs VIX futures is a very interesting exercise. Not clear which market is right more often. Hi Vance, why does VXZ decay less than VXX? Hi Gregory, Short answer is that VXZ dynamically shifts the VIX futures it holds, often holding some short positions to offset the contango losses. For a longer answer see: sixfigureinvesting. com201109under-the-hood-of-xvz Thanks again Vance, I’ve had nearly 2 years of success thanks to your blog. Can someone explain to me why when the VIX is up almost 5% today (227), VIX calls are down (some significantly) and puts are up ? Seems bizarre… VIX Options.

VIX OPTIONS TRADING method TO ADAPT GORILLAPICKS FOR OPTIONS INVESTING. Due to the recent lack of suitable GorillaShorts, the Gorilla would like to recommend adding a supplementary method to aid in reducing portfolio risk and improving portfolio returns. Since the action of shorting can be the riskiest investment one can make, the Gorilla would rather see subscribers partake in a pure portfolio hedge, rather than depending on an individual company’s decline. Therefore, the Gorilla introduces the use of Volatility Index, or VIX options, to protect profits in an appreciated portfolio to guard against the inevitable, unpredictable, market corrections due to unforeseen events. Since the introduction of this type of index option in February of 2006, the Gorilla has been studying a new method that appears to work very well for those looking to hedge their portfolio. VIX options: A type of non-equity option that uses the CBOE Volatility Index as the underlying asset. This is the first exchange-traded option that gives individual investors the ability to trade based upon market volatility. Thus, trading VIX options may provide subscribers with a supplementary tool to hedge their portfolios against sudden market declines, as well as to speculate on future moves in volatility. Unlike standard equity options, which expire on the third Friday of each month, VIX options expire on a Wednesday each month. There is no question that these options are being used, and they are quite liquid. A trader who believes that market volatility will increase (either on the market’s way up OR down) now has the ability to profit on this outlook by using VIX options. Sharp increases in volatility generally coincide with a falling market (or a market in a strong advance!), so this type of option can be used as a natural hedge, rather than using typical index options. Unlike standard equity options, which expire on the third Friday of every month, VIX options expire on a Wednesday each month.

Therefore, investors now have a new instrument to add to their trading arsenal one that isolates volatility, trades in a range, has high volatility of its own, and cannot go to zero. For those who are new to option trading, the VIX options are even more exciting. Most investors who focus on volatility trading are both buying and selling options, but new investors will often find that their brokerage firms do not allow them to sell options. By buying VIX calls or puts (or spreads), investors can now have access to trades based upon overall market volatility. While the Gorilla cannot recommend specific strategies for individual subscribers, keep in mind that in times of low volatility, like we are currently experiencing, it is a good idea for investors to buy calls or implement call spreads by using VIX options. The biggest advantage of VIX options is its negative correlation to the S&P 500. Such a method enables an investor to diversify hisher portfolio and hedge against market drops, thus allowing for speculation that the VIX will rise again in the future, reverting back to its mean. To view more information about Volatility Index options, please refer to the website of the Chicago Board of Options (CBOE). Stay in touch! Follow us on one of these popular social spaces for stock updates, exclusive news and more. © 1999 - 2017 Gorilla Trades - Investing In Stocks Just Got Easier. | All Rights Reserved. how+to+trade+vix+options.

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