Learn the trade here. Make it on tradeMONSTER

Options Trading News

April 18, 2013  Thu 9:11 AM CT

VIX: SEE CHART GET CHAIN FIND STRATEGIES
The VIX may have just jumped in the last three days, but volatility in the S&P 500 has actually been rising for the last month.

The VIX is known in the popular media as the "fear gauge," but its real name is the CBOE Volatility Index, and that is what it really is: just a statistic that is derived from the SPX options in the front two months. It gives us an idea of the volatility that traders are expecting in the next 30 days.

The VIX closed Friday at 12. It has since jumped above 17, on Monday and again yesterday. A 40 percent move higher is definitely significant, but the VIX is most closely tied to the actual volatility in the SPX, which has seen a bigger increase. A month ago the 10-day historical volatility of the SPX (measuring the day-to-day past movement) was 5 percent, but today it climbed more than 19 percent for a gain of almost 300 percent.

There are a few ways of trying to take advantage of increasing volatility. We hear people recommend "buying the VIX," though the index is just a statistic, not a tradable entity. You can buy VIX futures, but those have different prices. And the VIX options and exchange-traded funds and notes are all based on those VIX futures.

Usually the VIX futures trade at an increasing premium to the spot VIX, a situation known as contango. But at times of market turmoil, the spot VIX can climb above the futures, which is what we have right now.

While the VIX futures, calls, and exchange-traded funds are usually quite expensive hedges on long equity positions, it is times like these that they become quite appealing. Yes, the data means that traders expect the spot VIX to calm down to the level of the May futures in the next month, but research has shown that the volatility index typically does a better job than the VIX futures in predicting where volatility will be going forward.

Volatility comes in waves, and it has been building in the actual volatility of the SPX of the last month and in the VIX in the last three days. I can't say when this wave will recede, but I do know that it makes sense to be prepared for more.

Using the VIX products usually has a negative expectation, but when the volatility index is above the futures, it becomes a very appealing trade.

(A version of this article appeared in optionMONSTER's Advantage Point newsletter of April 17.)
Share this article with your friends


Related Stories

VIX

VIX drops again as equities rally

October 21, 2014

All of the major equity indexes were higher yesterday, driving the CBOE Volatility Index lower by more than 15 percent.

VIX

Videocast: Volatility quieting down

October 20, 2014

As stocks drift higher after last week's selloff, Group One's Jamie Tyrrell says the big trades today are selling October VIX calls.

VIX

VIX falls as equities close mixed

October 20, 2014

Equity indexes were mixed on Friday to finish a volatile week, while the CBOE Volatility Index dropped nearly 13 percent.

VIX

Videocast: Volatility down big today

October 17, 2014

Group One's Jamie Tyrrell says the volatility index is back down near the 20 level in today's rally, with near-term futures getting "crushed."

VIX

Videocast: November VIX calls sold

October 16, 2014

Group One's Jamie Tyrrell says traders are holding onto protection for the next few days but are selling the November VIX calls, apparently believing that volatility levels are too elevated.

Premium Services

Free Webinars

Make Money in a Volatile Market

Education & Strategy

Vexed by the VIX

Many people probably don't know that the calculation changed for the CBOE Volatility Index this week, but it's worth discussing...

View more education articles »
optionMONSTER stockMONSTER tradeMONSTER