How To Trade The VIX

By Bill Luby on August 18, 2009

Based upon the search terms that are landing visitors on the blog this morning, it seems as if many readers are interested in how to trade the Volatility Index (^VIX: 27.89 +3.62 +14.92%). This question really boils down to two separate issues: strategies and trading vehicles.Since I have talked about strategies repeatedly in this space in the past, I thought I would offer a quick summary of trading vehicles today. First off, it is not possible to trade the VIX directly. The VIX index (sometimes referred to as the cash or spot VIX) is a statistic that the CBOE calculates and disseminates every 15 seconds during the trading day.

Fortunately, there are a number of VIX derivatives that allow traders to take positions on the VIX without owning the underlying. In no particular order, they are:
1. VIX options - these include standard options as well as VIX binary options
2. VIX futures - standard VIX futures contracts have a contract size of 1000 times the VIX; the recently added mini-VIX futures have a contract size of 100 times the VIX
3. VIX ETNs - currently consists of two exchange traded notes: the iPath S&P 500 VIX Short-Term Futures ETN (VXX: 62.07 +3.20 +5.44%) and the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ: 87.865 +3.055 +3.60%). The former targets one month VIX futures and the latter targets five month VIX futures.

In addition to VIX products, one can always trade options on the SPX (or SPY). A long VIX position is very similar to a long SPX straddle (or strangle); a short VIX position is very similar to a short SPX straddle (or strangle.)