- Investors have traded the CBOE Volatility Index (VIX) since it was first created as a measure of investor sentiment regarding future volatility.
- Buying exchange-traded funds (ETFs) and exchange-traded notes (ETNs) related to VIX is the most common way to trade it.
- The iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) and the ProShares Short VIX Short-Term Futures ETF are both VIX-related ETFs and ETNs (SVXY).
What is the procedure for purchasing VIX futures?
You can’t even buy a basket of underlying components to mirror the VIX, unlike a stock index like the S&P 500. Instead, futures contracts and exchange-traded funds (ETFs) and exchange-traded notes (ETNs) that own those futures contracts are the only ways for investors to gain access to the VIX.
VIX futures are traded on what exchange?
VIX futures were first traded on the Cboe Futures ExchangeSM (CFE) in 2004. They allow market participants to trade a liquid volatility product based on the VIX Index methodology. VIX futures reflect the market’s prediction of the VIX Index’s value at various future expiration dates. VIX futures give market players a number of ways to put their ideas into action through volatility trading tactics such risk management, alpha generation, and portfolio diversification.
Is a VIX ETF available?
VIXM, VXZ, and VIXY are the VIX exchange-traded funds (ETFs) with the best one-year trailing total returns. To follow market volatility, all three ETFs own futures contracts.
By CFE
Volatility has emerged as an asset class over the last decade, with VIX Futures leading the way. In 2004, the CBOE Volatility Index (VIX) was used to launch financial futures trading. This was the first time a publicly traded derivative that allowed investors direct exposure to projected market volatility was accessible for trading. If you’re thinking about adding volatility to your trading and portfolio management toolbox, there are a few things to keep in mind before you get started.
What Does the CBOE Volatility Index (VIX) Indicate?
VIX is a standardized measure of near-term volatility based on option pricing for the S&P 500 (SPX).
The VIX is calculated using two separate expiration sets of SPX options, with the two series being time weighted to produce a consistent 30-day measure of implied volatility.
When the S&P 500 is under pressure, the demand for SPX put options rises, causing VIX to rise.
Because of the heightened demand for portfolio protection when the market is under pressure, VIX has earned the moniker “The Fear Index.”
2. The VIX Index and the S&P 500 Index
Traders have been trained to believe that when the S&P 500 falls, VIX increases, and when the S&P 500 rises, VIX falls. This view has some merit because the long-term daily price change connection between the S&P 500 and VIX is extremely close to -0.75. On occasion, though, both the S&P 500 and the VIX move in the same direction. In fact, VIX and the S&P 500 price moves move in the same direction on around 20% of trading days. From January 2004 through July 2016, the table below shows the link between VIX and the S&P 500 on days when equities were higher and days when they were lower.
From August 2015 to July 2016, the daily price action in the S&P 500 and VIX is seen in the chart below.
There have been a few instances where the S&P 500 has dropped off sharply, and VIX has surged in reaction.
Contract Specifications for VIX Futures
A VIX Futures contract has a notional value of $1000 times the index. Futures trade in 0.05 or ($50 a tick) increments, but calendar spreads may be quoted in 0.01 ($10 a tick) intervals. In June 2014, the trading hours for VIX Futures were extended to nearly 24 hours a day, five days a week. Spot VIX is calculated and quoted outside of US trading hours, starting at 2:15 a.m. Chicago time, which is when European markets open.
The CBOE Futures Exchange has been listing VIX Futures expiring each week for multiple weeks in a row for just over a year.
There are also regular VIX Futures contracts that expire every month.
Standard expiration is usually on a Wednesday, which is 30-days before the standard third Friday SPX option expiration date the following month.
The VIX futures quotes from August 15, 2016 are shown in Figure 2.
VIX Weeklys Futures and regular VIX futures are used in the above quotes.
The VIX/Q6 contract is the typical VIX contract for August.
The quotes that start with a number are VIX Weekly Futures, and the numbers denote the week in which these contracts expire.
VIX futures are contracts that are settled in the morning.
The final settlement value for VIX Futures is the VIX Index’s Special Opening Quotation (SOQ). The SOQ is derived from the opening prices of constituent SPX or SPX Weeklys options that expire 30 days following the VIX expiration date. The ticker VRO is used to communicate the final settlement value for VIX futures. The day before settlement is the last trading day for VIX Futures, thus a contract that is set to expire on Wednesday morning will stop trading at 3:15 p.m. Chicago time the day before settlement. This means that on the day of settlement, a contract slated to expire will not trade during non-US hours.
Spot VIX and other VIX futures may trade at a premium or discount to VIX Futures contracts.
The majority of trading days, VIX Futures are trading at a premium to spot VIX as well as futures contracts that expire before the particular contract’s expiration date.
The pricing of spot VIX and regular VIX futures contracts on the Friday before and after the recent Brexit vote is shown in Figure 3.
RISK DISCLAIMER: Trading futures products carries high risk of loss, which must be acknowledged before trading and may not be suitable for all investors. Actual trades or methods referenced above may have performed well in the past, but this does not guarantee that they will perform well in the future. Phillip Capital Inc. bears no responsibility for errors or omissions in the material included herein, which is supplied to you solely for informational purposes and is believed to have been derived from reliable sources but cannot be guaranteed. The author’s thoughts and opinions in this letter are his or her own and do not reflect those of Phillip Capital Inc. or its employees.
Is it possible to day trade VIX futures?
Volatility exchange-traded funds come in a number of flavors, including inverse volatility ETFs. Inverse volatility ETFs move in the opposite way of traditional volatility ETFs, i.e., in the same direction as major stock market indexes. A simple ETF/ETN with high volume is usually the best choice for day trading. The iPath S&amp
Does VIX trade around the clock?
With Cboe Options Exchange’s increased global trading hours (GTH) for SPX and VIX options to almost 24 hours a day, five days a week, you can trade or hedge broad stock market and global equity volatility effortlessly across all time zones, day and night (24×5).
Market players will benefit from extended GTH since it will provide them with more convenience, access, and chances to react to market moving events and access U.S. index options from any time zone. Here are three reasons to look at extended GTH options for SPX and VIX:
Is it possible to purchase and sell India VIX?
- India VIX and Nifty have a negative correlation, with VIX falling as Nifty rises and vice versa.
- When the India VIX is high, the market expects a huge change in the Nifty, and vice versa.
- As indicated in the table above, the range of India VIX over the previous four years has been between 13 and 35. Yes, VIX jumped to 50+ levels in 2009 when we had two upward circuits swings on the day the election results were published, but the range has been between 13 and 35 since then. Looking at the last four years of data, we can say that VIX is high if it is over 25 and low if it is below 15, therefore the usual range is 15 to 25.
Trading India VIX
India VIX is an index, and, like Nifty, you can’t actually trade an index without having derivative (F&O) contracts on it. With the advent of India VIX futures, we may now use the India VIX to hedge our portfolio’s volatility risk and/or bet on it.
- Tick size: With a tick value of Rs 0.0025, the India VIX will be calculated up to four decimals (for example, India VIX today is 17.0025)
- Price of quotation: India VIX * 100 (multiples of 100). If a trader wants to purchase or sell India VIX futures contracts at 14.1475, the price that should be offered is Rs.1414.75.
- Margin: Initial Margin of 9% plus Exposure Margin of 5% equals 14% of the contract value.
- If you have a stock portfolio and are concerned about markets falling or volatility rising, consider investing in India VIX futures.
- You notice that India VIX is nearing the peak of its four-year range (about 35), and you predict that it will fall: you can short India VIX futures.
- Elections are approaching, and the India VIX is hovering around 20, indicating that market volatility may increase: you can buy India VIX futures.
Using India VIX instead of Options
The Black-Scholes model predicts that if all other factors remain constant, the price of options rises with rising volatility and falls with falling volatility. Buying or selling options is now the only means to trade volatility (calls or puts as may be the directional bias of the market). The disadvantage of this method is that in the actual world, other factors such as time decay (theta factor) and stock price (delta factor) do not remain constant as volatility moves. As a result, a trader’s ability to just trade volatility with options becomes difficult. A volatility trader who uses the India VIX will be able to trade considerably more efficiently.
Technical Analysis and India VIX
When looking at the historical data for the India VIX, it is clear that it is not a progressive data series, but rather an oscillating data series (range has stayed between 13 and 35). Because the India VIX does not trend after a certain point, but rather oscillates in a range, we should utilize oscillators instead of trending indicators like moving averages. Bollinger Bands are an example of a decent oscillator to employ. See how India VIX has reversed most of the times it has crossed either the upper or lower end of the 20-day Bollinger Band in the chart below.
If you’re a technical analyst, you can predict the movement of the India VIX using other similar oscillators.
Is it a smart idea to invest in India VIX?
The VIX index evaluates short-term volatility over a 30-day period. As a result, it calculates using options that expire in the current month and the following month. It is assumed that the option premium at the strike price of NIFTY is a reflection of the broader market’s implied volatility.
Averaging the order book of NIFTY options is considered a good measure of market volatility by India VIX. It makes use of a complicated statistical formula that you won’t have to master. However, you must comprehend what it means to arrange deals.
- India VIX is a good indicator of market risk for day traders. It informs traders when stock prices rise or fall in response to changes in market volatility. Intraday traders, for example, risk having their stop loss levels triggered if the VIX value rises. As a result, they can lower their leverage or raise their stop loss.
- Long-term investors are unconcerned about short-term volatility, but growing India VIX provides a fair gauge of increased concerns in the long run, when institutional investors can increase their hedge by playing the market heavily with put options.
- For buy and sell decisions, options traders rely largely on volatility measures. When volatility grows, for example, options become more desirable and profitable to buyers. In times of low volatility, on the other hand, options tend to lose value as they approach expiration.
- Volatility can be traded in a variety of ways. When market volatility escalates, traders can buy straddles or strangles. However, this trading approach is costly. As a result, instead of worrying about market direction, one can invest heavily in VIX index futures.
- India The VIX and the NIFTY have a negative relationship. When plotted against a nine-year timeline since VIX’s inception, NIFTY showed the opposite trend. As a result, when the VIX is low, NIFTY rises and vice versa. It gives investors a good sense of how the market will behave.
- Portfolio and mutual fund managers boost their exposure to high Beta portfolios when the India VIX value peaks. When the VIX value is low, they would choose low Beta stocks.
- For option writers, the India VIX is crucial. Options writers with a high VIX value have the potential to take on unlimited risk while reaping restricted gains (premium). In a handful of trading sessions, out of money options contracts can convert into at the money or even in the money contracts if the market enters a period of extreme volatility.
Let’s look at an example of how option writers use VIX value in contract writing. Assume an options writer wishes to create a 275-rupee contract for ABC stocks at a current price of 310-rupees. On a seven-day expiry contract, he proposes to sell 3000 shares for a premium of Rs 10. Contract prices could fall to Rs 230 in two days due to the current market instability. As a result, his loss will be after five days.
He loses Rs. (230+10) Rs. 275 or Rs. 35. His total loss per lot is Rs 105,000. As a result, he should either avoid writing the contract or demand a hefty fee if he does.