The VIX Explained

What exactly is the VIX and what does it tell us? Check out the article below if you’re not sure.

VIX – Basics
The VIX is a forward looking tool that measures the expected future volatility of the S&P 500 stock index (NYSEArca: SPY) for the next 30 days. The VIX is quoted in percentage points and it was first introduced in a research paper by Professor Robert E. Whaley at Duke University.

Today, the VIX indicator has become a popular gauge of investor fear and complacency. A high VIX reading signals fear whereas a low reading means increasing risk appetite among investors. By using a weighted blend of various S&P index options, the VIX attempts to estimate the implied volatility for U.S. stocks.

Betting on Volatility – Good idea or Bad?
Although there is no way to invest directly in the VIX, trading the VIX can be done with futures contracts or options. The cost of futures or options contracts will be impacted by factors like the expiration date of the contracts and the S&P 500’s movements. A surging VIX will undoubtedly result in more expensive contracts, whereas a falling VIX, the opposite.

The advantage of trading options or futures is that it allows the trader to choose the expiration date of their bet. The disadvantages are time decay and the wild swings that come with the territory.

Financial products that leverage the VIX include the Velocity Shares Daily 2x VIX Medium Term ETN (NYSEArca: TVIZ) and the Velocity Shares Daily 2x VIX Short Term ETN (NYSEArca: TVIX). For VIX bears, Credit Suisse also has inverse or short versions on the same theme with VIX short term (NYSEArca: XIV) and medium term (NYSEArca: ZIV).

See the EFT Guide for the rest of the story

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