Trading the VIX

Why Trade VIX

VIX is the symbol for CBOE Volatility Index. This page assumes you are already somehow familiar with the VIX, what it is, and (at least the logic of) its calculation.

There are two big groups of motivations why people or institutions trade the VIX:

Trading the VIX for hedging

Many market participants, especially institutional investors, trade VIX to hedge their long stock portfolios. Because stock market volatility tends to rise when stock prices are falling, the VIX Index is strongly negatively correlated to equities. As a hedging tool, VIX derivatives have several advantages over stock index options (e.g. it’s easier to set up and manage a position and you often get the same hedging effect at a lower price with VIX).

Trading the VIX for speculation

In the recent years, in line with increased liquidity and public awareness of VIX Index and its derivatives, VIX has become a convenient pure volatility play, enabling traders to speculate on volatility without having to deal with other exposures (such as delta of stock index options).

VIX Trading Specifics

When trading the VIX, you should be aware of its specifics, which make it quite different from other markets you might be used to:

Trading VIX Futures vs. Options

So which one is better to trade – VIX futures or VIX options? There is no universal answer, as both have advantages and disadvantages. VIX futures contracts may be too big and too volatile (in short – too risky) if you have smaller account size. Options, on the other hand, may seem too complex to understand and analyze (as you are dealing with “volatility squared” here – volatility of volatility). I believe that VIX futures and VIX options go hand in hand and it’s not a good idea to just focus on one and ignore the other. Even when you are only trading VIX options at a moment, knowing what VIX futures are doing is useful (and vice versa).

VIX Trading Strategies

Some sources of edge when trading VIX

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