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.

The first two choices are not for the faint of heart. 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. 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. 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. This is a substantial tracking error. Given its dismal track record, it is 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 significantly down day, you can be pretty confident VXX will have a good day—unlike some investments like gold.

How to Trade the VIX; Profit From Volatility - Barron's

On June 1st 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 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.

Most of the action is over in a few days. The other group is a straight volatility play, but with a design that attempts to minimize losses when the market is quiet.

If you buy options or ETPs and UVXY or VXX you will likely see your money wither away. Related Posts How Does VMIN Work? Is Shorting UVXY, TVIX, or VXX the Perfect Trade? Near Real Time Graphical VIX Term Structure Volatility Related Indexes and Tickers.

I'm delighted to see someone else who is interested in the VIX and volatility — and has some excellent content on the subject. The next best choice is probably VIX futures, from which, as you point out VXX and VIX options for all practical purposes are derived. Early both ETNs were priced above 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?

I have corrected the post to reflect the January launch. Hi Paul, The vol curve is not something that I follow directly. As a longer term investment VXX has shown that it doesn't track the VIX index short term volatility metric particularly well. 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. Hi Bill, Thanks for the feedback. Thanks for the bogroll mention, I really appreciate it.

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. Over the long run multiple months the VXX will always go down.

You should only buy it when you think the market it going to fall sometime in the near future. 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, in a day then trade , a week later. I like it much more than VXX which is not as volitile. 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.

It will probably take a year for that to play out.

Strategies To Trade Volatility Effectively With VIX | Investopedia

Which Volatility Hedged ETF Should You Consider? Should we expect that decay to exist in the long term? Hi Vedast, The big problem is volatility spikes. Yes, eventually it will probably recover, but it might take years. Not many people can stomach that big of a drawdown without pulling out. Thank you for your reply. This was a quiet period, but it shows what a contango powered period is capable of.

By the way, I expect to be a more volatile year than —maybe something like Hi Vance, Thank you for reply my question. Hi Benson, Most ETFs are ok for long term holding. The problem in general with leveraged ETFs e. TVIX has an additional problem, negative roll yield. For more see this post. Hi there Vance, 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. Hi Adam, Using Dec numbers your ATM put S42 would cost around 2.

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. VXX tracks its index very well. Hopefully you know that the VIX Call will not track the VIX, but rather the Feb VIX futures. 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: Will the options be exercised?

If this is the case, what exactly would I be selling since VIX cannot be directly invested? Compared to their respective lows in mid Dec , VXX is up about From your excellent discussion, this implies that F1 and F2 have been in backwardation during this time, rather than the much more typical contango.

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 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: VIX options are effectively tied to VIX futures not the VIX itself. Unless very close to expiration the futures tend to have a mind of their own.

For more see https: How to go long on the VIX index Updated: 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. For more information on VXX see How Does VXX Work? The fifth option, buying VIX options, is no more difficult than buying equity options.

Unfortunately, they too lag the VIX index because they track VIX futures, not the VIX index. In addition to their sluggish performance, they have these other issues:. The posted greeks delta, gamma, etc.

Introducing The VIX Options

Like all options, their premium value erodes with time, especially as you approach expiration. Cheers and welcome to the blogosphere, -Bill. Hi Vance, I didn't realized this was your new blog. Hoping seven or eight figure investing is just around the corner, -Bill. Is trading the Vix like trading a stock or does it expire like an option. Thank you for the article and your time. UVXY is the correct symbol. Is there any chance TVIX to go 20 again? It would take a style crash get it that high, — Vance.

It would take a massive rally in Gold. Hello Vance, Compared to their respective lows in mid Dec , VXX is up about How do you understand this change, and what factors do you think would sustain or curtail it?

Hi Vance, why does VXZ decay less than VXX?

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