What do I need to know about VIX futures before getting involved

VIX futures are tradable instruments intended to measure, and enable speculation on, expectations of future volatility. Because the VIX value is derived from the implied volatility (the portion of an option price attributed to expectations of future volatility) in S&P options, it is commonly referred to as the “fear index”.

Although in most contexts, volatility can mean violent price swings in either direction; when it comes to the VIX index, the term volatility is synonymous with selling pressure in the equity markets. Accordingly, in general, as the S&P goes up the VIX goes down, and vice versa.

In essence, VIX futures give speculators an opportunity to directly trade human emotions; specifically fear and complacency. In most circumstances, I would argue that trading VIX futures is probably something that should be avoided due to certain characteristics of the contract (discussed later). However, going into the summer of 2014 with the VIX trading at annual lows, and near all-time-lows; there were solid arguments for at least giving it some thought.

Nonetheless, there are some aspects of the VIX futures market that traders should be aware of before risking their trading capital.


More about the VIX in the August 2014 issue of Stocks & Commodities Magazine

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