4 Ways to Trade the VIX

The one changeless in the livestock markets is change. Said differently, volatility is a constant companion to investors, which is why the Cboe Volatility Index ( VIX ) is such a widely tracked market index. ever since this measurement of investor opinion regarding future volatility was introduced ( with futures and options following by and by ), many investors have wondered about the best ways to trade the VIX Index .

Realizing the generally negative correlation coefficient between excitability and stock market performance, many investors have looked to use volatility instruments to hedge their portfolios. In this article, we ‘ll review four ways you can trade the VIX using specific exchange-traded funds and exchange-traded notes .

Key Takeaways

  • Since the Cboe Volatility Index (VIX) was introduced, investors have traded this measure of investor sentiment about future volatility.
  • The primary way to trade on VIX is to buy exchange-traded funds (ETFs), and exchange-traded notes (ETNs) tied to VIX itself.
  • ETFs and ETNs related to the VIX include the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) and the ProShares Short VIX Short-Term Futures ETF (SVXY).

Start With Understanding the VIX

Before trading exchange-traded funds ( ETFs ) and exchange-traded notes ( ETNs ) tied to the VIX itself, it ‘s significant to have a open understand of what the VIX actually represents. VIX is the ticker symbol that refers to the Cboe Volatility Index. While much presented as an indicator of breed grocery store excitability ( and sometimes called the “ Fear Index ” ), that is not wholly accurate .

VIX is a slant mix of the prices for a blend of S & P 500 index options, from which imply volatility is derived. VIX very measures how a lot people are will to pay to buy or sell the S & P 500, with the more they are volition to pay suggesting more uncertainty .

This is not the Black Scholes model —VIX is all about “ entail ” excitability and measures the commercialize ‘s expectations for volatility over the coming 30 days. What ‘s more, while VIX is most often talked about on a spot footing, none of the ETFs or ETNs out there present topographic point VIX excitability. alternatively, they are collections of futures on the VIX that only roughly approximate the performance of VIX .

A Host of Choices

The iPath Series B S & P 500 VIX Short-Term Futures ETN ( VXX )

While investors will much refer to VIX ETFs, the fact is that the majority of the investments offered are exchange-traded notes ( ETNs ). One of the largest and most successful VIX products is the iPath Series B S & P 500 VIX Short-Term Futures ETN ( VXX ). The VXX is issued by Barclays Capital and has an expense ratio of .89 % and more than $ 537 million in assets under management ( AUM ) as of April 2022 .

The ETN once traded as the iPath S & P 500 VIX Short-Term Futures ETN ( VXX ) from its origin date of Jan. 29, 2009, until its adulthood go steady of Jan. 30, 2019. previously, VXX had a 10-year adulthood, whereas the series B is a 30-year ETN and matures on Jan. 23, 2048 .

This ETN holds a farseeing position in first and second-month VIX futures contracts that roll casual. Because there is an policy premium in longer-dated contracts, the VXX experiences a negative roll move over ( basically, that means long-run holders will see a punishment to returns ) .

As a result, the performance of the VXX is solid in the short terminus but not in the long term. Below are the investment returns based on assorted time periods as of Mar. 31, 2022 :

  • One month: -15.26%
  • Three months: 10.00%
  • One year: -55.31%
  • Three years: -44.19%

Because excitability is a mean-reverting phenomenon, VXX often trades higher than it otherwise should during periods of humble present excitability ( pricing in an anticipation of increased volatility ) and lower during periods of high present excitability ( pricing a return to lower volatility ) .

The iPath Series B S & P 500 VIX Mid-Term Futures ETN ( VXZ )

The iPath Series B S & P 500 VIX Mid-Term Futures ETN ( VXZ ) is structurally similar to the VXX, but it holds positions in fourth-, fifth-, sixth-, and seventh-month VIX futures .

consequently, this is much more a measure of future volatility, and it tends to be a much less volatile meet on volatility. This ETN typically has an median duration of around five months, and that same negative scroll move over applies—if the market is stable and excitability is humble, the futures index will lose money .

VXZ has an expense ratio of .89 % and more than $ 58 million in assets under management ( AUM ) as of March 2022 .

alike to VXX, the returns for VXZ are better in the brusque term versus the retentive term. Below are the performance returns based on available clock time periods as of Mar. 31, 2022 :

  • One month: -1.83%
  • Three months: 3.03%
  • One year: -8.93%
  • Three years: 13.66%

The ETN once traded as the iPath S & P 500 VIX Mid-Term Futures ETN ( VXZ ) and had a maturity date of Jan. 30, 2019. The origin date for the series B 30-year ETN was Jan. 17, 2018, and the adulthood date is Jan. 23, 2048.

The ProShares VIX Mid-Term Futures ETF ( VIXM )

The ProShares VIX Mid-Term Futures ETF ( VIXM ) VIXM tracks the S & P 500 VIX Mid-Term Futures Index, which measures the portfolio returns of VIX futures contracts that have a burden average of five months to exhalation. VIXM uses Cboe VIX futures contracts to help investors earn a profit from an increase in expected volatility in the S & P 500 index.

The VIXM has an expense ratio of 0.85 % and more than $ 101 million in assets under management ( AUM ) as of Apr. 21 2022 .

Below are the performance returns of the SVXY based on available fourth dimension periods as of Mar. 31, 2021 :

  • One month: -1.84%
  • Three months: 3.04%
  • One year: -10.15%
  • Three years: 13.42%

The VIXM holds relatively longer-dated futures contracts and does n’t track the CBOE VIX. As a resultant role, the fund can perform differently from the VIX. The VIXM is designed for knowing investors with a short-run investment goal or who may want to hedge their equity exposure.

The ProShares Short VIX Short-Term Futures ETF ( SVXY )

There is besides an ETF for investors looking to play the other side of the volatility mint. The ProShares Short VIX Short-Term Futures ETF ( SVXY ) is an inverse ETF that seeks daily investment results equal to one-half the inverse of the daily performance of the S & P 500 VIX Short-Term Futures Index .

The SVXY has a slenderly higher expense proportion of .95 % and more than $ 440 million in assets under management ( AUM ) as of April 21, 2022 .

A critical cardinal for investing in SVXY is understanding that the fund is only intended for short-run trading and is not a buy-and-hold strategy. SVXY seeks its inverse return from its underlie benchmark for a single day, as measured from one net asset value ( NAV ) calculation to the next. Investors in SVXY should monitor and manage their investments day by day. Inverse ETFs held for more than a day can lead to significant losses .

Below are the operation returns of the SVXY based on available prison term periods as of Mar. 31, 2021 :

  • One month: 6.17%
  • Three months: -11.36%
  • One year: 15.84%
  • Three years: 1.38%

Because inverse ETFs can rack up significant losses cursorily, they are designed for intimate investors who should carefully consider their risk tolerance before investing.

Beware the Lag

Investors considering these ETFs and ETNs should realize that they are not great proxies for the performance of the descry VIX. These funds can be expected to perform identical differently from the VIX. Some may rise or fall in tandem with VIX, but the pace at which they move and the lag time can make pinpoint submission and die points challenging tied for seasoned traders .

market volatility investments are well suited for investors with a short-time horizon who can closely watch their positions and move quickly if the market turns against them .

If investors want to place bets on fairness market volatility or use them as hedges, the VIX-related ETF and ETN products are satisfactory but highly-flawed instruments. however, they surely have a firm appliance aspect to them, as they trade like any other stock .

What Is the VIX?

The Cboe Volatility Index ( VIX ) represents the market ’ randomness expectations for the strength of short-run monetary value changes ( or excitability ) in the S & P 500 index ( SPX ). The level of market volatility is used to gauge market sentiment and the level of fear and doubt among commercialize participants .

How to Trade the VIX?

The VIX, which is a measurement of excitability, can be traded through exchange-traded funds that track volatility with the goal of earning short-run gains or hedging equity market excitability.

When Does VIX Trading Begin and End?

Investors can trade the VIX options and VIX ETFs during regular U.S. trade hours of 9:30 ante meridiem to 4 post meridiem Eastern time .

source : https://www.peterswar.net
Category : Finance

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