VIX Futures Explained

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How to Buy the VIX

Updated: December 31, 2020 | References

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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.

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A Flawed Starting Point?One significant factor in assessing exchange-traded funds (ETFs) and exchange-traded notes (ETNs) tied to VIX is VIX itself. VIX is the ticker symbol that refers to the Chicago Board Options Exchange Market Volatility Index. While often presented as an indicator of stock market volatility (and sometimes called the “Fear Index”) that is not entirely accurate.

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.
What’s more, while VIX is most often talked about on a spot basis, none of the ETFs or ETNs out there represent spot VIX volatility. Instead, they are collections of futures on the VIX that only roughly approximate the performance of VIX.

SEE: The Volatility Index: Reading Market Sentiment
A Host of Choices
The largest and most successful VIX product is the iPath S&P 500 VIX Short-Term Futures ETN (ARCA:VXX). This ETN holds a long position in first and second month VIX futures contracts that roll daily. Because there is an insurance premium in longer-dated contracts, the VXX experiences a negative roll yield (basically, that means long-term holders will see a penalty to returns). What’s more, because volatility is a mean-reverting phenomenon, VXX often trades higher than it otherwise should during periods of low present volatility (pricing in an expectation of increased volatility) and lower during periods of high present volatility (pricing a return to lower volatility).

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.”

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SEE: Dissecting Leveraged ETF Returns
Nevertheless, there are also ETFs and ETNs for investors looking to play the other side of the volatility coin. The iPath Inverse S&P 500 VIX Short-Term ETN (ARCA:XXV) basically looks to replicate the performance of shorting the VXX, while the VelocityShares Daily Inverse VIX Short-Term ETN (ARCA:XIV) likewise seeks to deliver the performance of going short a weighted average maturity of one month VIX futures.

Beware the Lag
Investors considering these ETFs and ETNs should realize that they are not great proxies for the performance of the spot VIX. In fact, studying recent periods of volatility in the S&P 500 SPDR (ARCA:SPY) and the changes in the spot VIX, the one-month ETN proxies captured about one-quarter to one-half of the daily VIX moves, while the mid-term products did even worse. The TVIX, with its two-times leverage, did better (matching about half to three-quarters of the performance), but consistently provided less than fully two-times the performance of the regular one-month instrument. Moreover, because of the negative roll and volatility lag in that ETN, holding on too long after the periods of volatility started to significantly erode returns.

The Bottom Line
If investors really want to place bets on equity market volatility or use them as hedges, the VIX-related ETF and ETN products are acceptable but highly-flawed instruments. They certainly have a strong convenience aspect to them, as they trade like any other stock. That said, investors looking to really play the volatility game should consider actual VIX options and futures, as well as more advanced options strategies like straddles and strangles on the S&P 500.

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How Traders Can Make a Fortune Trading the VIX and VIX-linked Products — Right Now

Aug 25, 2020 2:40 PM EDT

NEW YORK (TheStreet) — Want strong returns when the market is on a wild ride and most investors are in selloff mode? Take a look at the I:VIX .

VIX is the ticker for the CBOE Volatility Index, which measures implied volatility of S&P 500 index options. As markets have been plunging over the last days and insecurity is high, it’s good advice to take a look at volatility indices. They are great trading tools in a down-turning market.

The VIX is calculated by the Chicago Board Options Exchange (CBOE) and shows the market’s volatility expectations for the next 30 days. In order to do this, the index tracks put and call options of the S&P 500. Currently, the VIX is the most commonly used method of measuring expected volatility.

A VIX value below 20 indicates low volatility. That means prices are not changing very quickly. On the other hand, a VIX above 30 is a sign of high volatility, which means uncertainty is high and there is fear in the markets. That’s why the VIX is often referred to as the “fear index.”

Due to the latest global sell-off, volatility is currently skyrocketing. Yesterday, the VIX had a closing value above 40 (as of August 24, 2020), which has been the highest value since more than three years. Today, it has fallen significantly to about 30 basis points.

VIX-Linked Products Make It Possible to Gain Directly From VIX Movements

There are several options to trade the VIX. The simplest approach is to buy Exchange Traded Notes (ETN) or Exchange Traded Funds (ETF) on the index.

The largest vehicle is the iPath S&P 500 VIX Short-Term Futures ETN (VXX) – Get Report . This product holds long positions in the first and second month futures contracts on the VIX. Hence, if markets are insecure and volatility goes up, the product gains in value.

The iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) – Get Report is a similar product, but it holds long positions in fourth, fifth, sixth and seventh month VIX futures. Additionally, there are other products which are structurally similar, but bear higher risk due to increased leverage.

Traders Don’t Have to Trade the VIX Directly to Make Money Off of It

However, an investor who wants to make money investing in the VIX doesn’t have to trade it directly. Another strategy is to buy put options during times of low volatility. This way, investors make a bet that markets are overbought and will turn bearish soon.

On the contrary, if the VIX is high, it makes sense to buy ETFs that track the S&P 500. Once the VIX is above 30, investors are panicking and selling their stocks based on fear. That leads to quickly falling stock prices. If the VIX starts to decline, it’s a good time for investors to place their buy.

In general, if volatility declines, stock prices will increase.

Investors should keep in mind that VIX-linked products are designed for knowledgeable traders who can assess the risk and understand market movements. Traders who are familiar with the concept of volatility and understand the basic structure of the VIX, will find this a great tool to trade in the current market environment.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

VIX Futures Curve Explained

VIX Futures Curve Explained

A futures curve is a curve made by connecting prices of futures contracts of the same underlying, but different expiration dates. It is displayed on a chart where the X axis represents expiration dates of futures contracts and the Y axis represents prices. The chart looks quite similar to yield curve, which is used for bonds or the money market and displays interest rates of different maturities.

VIX futures curve is made of prices of individual VIX futures contracts. The first point in the chart above (the one on the left end of the curve, not connected to the others) is the spot VIX index value; the others are futures prices.

VIX Futures Contango vs. Backwardation


When a futures curve is upward sloping from left to right, it is called contango (we say that a market is in contango). In case of the VIX, it is when near term VIX futures are cheaper than longer term VIX futures, like the example below.

Contango can be interpreted in the way that the market expects the VIX index to increase from its current level going forward. This is very common in VIX futures – in the long run, contango occurs vast majority of time, which is due to the skewed and mean reverting nature of the VIX and volatility in general (long time at low levels, with occasional big but mostly short-lived spikes). VIX futures contango is typically sharpest when the spot VIX Index is very low.


The opposite situation, when near term futures are more expensive and futures curve is downward sloping, is called backwardation.

Backwardation is less frequent than contango in VIX futures, but not uncommon. It typically occurs when the spot VIX index spikes and the market expects volatility to decrease again in the future.

VIX Futures Curve vs. VIX Term Structure

In general, a futures curve is often called “term structure”, but it really displays the term structure of the futures market. In case of the VIX, this might be a bit confusing, because there is another concepts of VIX term structure which is different from (and unrelated to) VIX futures.

This other VIX term structure is calculated from prices of S&P 500 index options, just like the VIX index itself. In fact, the VIX index (which measures implied volatility of S&P 500 options with target maturity of 30 days) is just one of the points on the VIX term structure. The other points measure implied volatility of S&P 500 options in the same way as the VIX index does, only with different maturities. You can find a detailed explanation of VIX term structure here.

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