VIX - Trade and understand CBOE Volatility Index

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What is the VIX?

The CBOE Volatility Index (ticker symbol: VIX) is a measure of expected volatility in the market. It is sometimes called the fear index because it rises when the market is panicking. It measures the expected volatility of the S&P 500 for the coming days and is calculated using the prices of put and call options on the S&P 500. It is thus a measure of the uncertainty that currently prevails in the market.

The Volatility Index is not directly tradable for private investors. However, it is possible to participate in the price development of the VIX via certain financial products. The VIX can also be interesting for trading, as its price fluctuations are very high in uncertain market phases. However, trading with the VIX is not very easy and involves correspondingly high risks.

How is the VIX calculated?

The current price of the VIX is calculated and issued by the Chicago Board Options Exchange (CBOE). The most important factors for the calculation of the VIX are the options on the S&P500. Both the standard options on the SPX and the short-dated options are used for this purpose. The standard options have a maturity of one month and expire at the end of each month. The short-dated options on the SPX expire every Friday.

On the basis of a certain formula, a value corresponding to the price of the VIX is obtained at the end. Various parameters of the already mentioned options flow into the formula. Here is an overview of the factors influencing the value of the VIX:

  • Options spread
  • Risk-free interest rate until the option matures
  • Time until the options expire
  • Exercise price of the options

What do the values of the VIX mean?

The VIX stands for the future level of volatility. Due to the calculation by means of call and put options, a condition about the markets can be derived from this. High values of the VIX mean a large volatility, i.e. a large fluctuation range on the markets. The VIX is a continuous indicator and stands for the expected volatility in the next 30 days, related to the previous volatility.

The VIX rises when stress on the stock market increases and prices fall. In particular, bad news that leads to large price losses causes the VIX to rise sharply. Even in a bull market, there is bad news that leads to price losses and corrections on the stock markets. These also cause the VIX to rise briefly, but it returns to low levels relatively quickly. In a bear market, however, the VIX can remain at a higher level for a longer period of time.

Vix chart tradingview
VIX in weekly chart on TradingView *

If you look at the Course of the VIX in the chart* over many years, a similar pattern can be seen again and again. While the stock market is in a bull market, the VIX is usually at values below 20. In tense market phases, such as in a bear market or a crisis, the VIX is usually between 20 and 40 for longer periods. In a bear market, one speaks of the capitulation and thus the low point of the bear market when the VIX reaches values above 40. However, in the event of extreme shocks to the market, the VIX can reach much higher values for a short period of time. For example, the VIX reached highs of around 85 at the height of the financial crisis in 2008 and in the Corona Crash in March 2020.

What can you use the VIX for?

The VIX is a popular index for trading due to its large fluctuations. There are many trading strategies that focus on the VIX. The large fluctuations offer great opportunities for traders. People like to trade the VIX as a CFD with leverage to take even better advantage of the fluctuations. However, the VIX as a CFD with leverage is a significant risk and can lead to a total loss.

In addition to trading, the VIX is often used as a Hedging against falling prices used. Professional investors in particular are increasingly using the VIX as a hedge against falling markets. This is because the VIX behaves contrary to the market. If the stock market falls, the VIX rises disproportionately. This makes it a popular product for hedging the broad stock market.

How to trade the VIX?

As an investor, you cannot buy the VIX directly, like a share, for example. The VIX is not a share or ETF, but an index on which other financial products are based. You can buy financial products that have the VIX as an underlying and change along with its price changes. For investors, there are different types of financial products that have reference to the Volatility Index and track it:

  • Options
  • CFDs

If you want to trade the VIX, it is important to understand the corresponding financial product. Below we give you a brief overview of a selection of 3 different financial products on the VIX. It is important to understand that trading the VIX is subject to correspondingly high fluctuation risks!

iPath S&P 500 VIX ETN on futures contracts

The iPath S&P 500 VIX ETN can be bought short-term and medium-term futures contracts (futures) on the VIX. The iPath S&P 500 VIX medium-term futures ETN (VXZ) holds long positions of the VIX futures for the coming fourth to seventh month. The positions are rolled into the upcoming futures contracts on a rolling basis.

The iPath S&P 500 VIX Short-Term Futures ETN (VXX) includes short-term futures contracts on the VIX that are rolled into the next contracts on an ongoing basis. Since the VXX refers to the short-term futures contracts on the VIX, it is more correlated with the daily fluctuations of the VIX.

Put and call options on the VIX

Options, i.e. call and put rights, on the CBOE Volatility Index are offered by various banks. Call options are used to speculate on rising prices on the VIX, i.e. on rising volatility. If the volatility rises, the market usually falls. For this reason, call options on the VIX can also be used as a hedge for the stock portfolio. With put options on the VIX.

Trade the VIX as a CFD

CFDs are another option for trading the VIX. A CFD on the VIX refers directly to the price of the VIX. One advantage of CFDs on the Volatility Index is that you can speculate on rising and falling prices. This gives you the opportunity to adapt your trading to any market situation. The standard leverage in the EU for indices such as the VIX is 1:20. However, it should be noted that the risk of loss is also significantly increased with leverage.

You can find suitable CFD brokers in our >>>CFD broker comparison<<<.