In an uncertain market, sometimes the best thing to trade is the uncertainty. One way to trade uncertainty is to buy options on the VIX. As the world of ETFs (Exchange Traded Funds) and ETNs (Exchange Traded Notes) keeps expanding, more and more investment opportunities are becoming available for traders who only trade stocks, ETFs, and ETNs.
What is the VIX?
The VIX is an index that tracks market volatility of the S&P 500. The VIX, also known as the “fear index,” shows whether there is more optimism or pessimism in the S&P 500. The higher the VIX the more pessimism or “fear” is in the S&P 500. The VIX indicates how many people are buying put options. The higher the VIX is the more people are buying puts. There are two main reasons to buy puts, one is to protect open positions and the other is to speculate on a downward move.
Two ETNs To Trade Market Volatility
- Short-Term Volatility
iPath S&P 500 VIX Short-Term Futures ETN (VXX) which buys rolling long positions in the VIX futures in the first and second month. Looking at the chart below, you can see the negative correlation to the S&P 500.
- Mid-Term Volatility
iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) also buys rolling long positions in the VIX futures but instead only has positions in the fourth, fifth, sixth, and seventh month.
Market Volatility Is A Trade Not An Investment
If you buy one of these ETNs, do so to hedge long positions or short the market, not an investment for the long term. Use these ETNs as trades only.
Tags: ETNs, InvestingStumble it!
Digg This Article
Subscribe To The DailyMoneyAdvice.com Feed
