The Volatility 75 Index (also known as VIX or the Fear Gauge) is a unique index that measures the volatility of the S&P500 Index. Trading the VIX offers unique strategic opportunities, since the Volatility 75 Index is a unique instrument with some specifications that make it ideal for strategic trading. We will discuss the way the VIX works and how unique trading strategies can be crafted around it below in the article, but first we will start with the question that most people who reach this page ask: which brokers offer VIX trading?
Below is a ranking of the best brokers offering VIX as a trading instrument:
You can use any of the above brokers to trade the Volatility 75 Index and many more instruments. Since the VIX is not a very common CFD instrument, it is not offered by many brokers. Including the VIX in their instrument list is a great proof that the above mentioned brokers are among the greatest in the world and you are safe to use them for all your trading needs.
The VIX is an index that measures the volatility of the most important stock market index in the world, which is the S&P500. The index has a value from 0 to 100 and can be interpreted in the following way: a low number means low volatility, while a high number means higher volatility.
It is considered that a reading below 30 of the VIX means the markets are pretty calm. If the number is too low (below 20), the market can be considered complacent.
The above chart shows how the Volatility 75 Index behaved in the last 15 years. It can be observed that the VIX went above 50 only during the Great Financial Crisis and during the recent Great Coronavirus Pandemic. It also crossed the 40 mark during the Eurozone Debt Crisis in 2012.
Generally speaking, volatility is good for day trading because during volatile markets there are higher intraday moves. With higher moves, there are higher opportunities for day traders. However, such opportunities come with increased risks as well.
Day traders love volatility because they no longer need to wait hours to see an asset move a few pips. During volatile markets, a few minutes are enough to see a significant move. However, high volatility can result in huge instant movements that can catch traders off guard, when news are released. Day traders need to be more alert during high volatility periods, and they need to be aware of news releases and not rely entirely on technical analysis.
The Volatility 75 Index can also be used by day traders to hedge their stock trades. When traders are bullish on stocks, a bullish position on the VIX can be used as a hedge. If the stock market goes suddenly down, the VIX usually goes up, so what is lost on the stock trade could be recovered on the VIX position.
There is a particularity that makes the VIX the ideal instrument for trading strategies: it is bound to a limited range. As you can see from the chart in the previous paragraph, the Fear Gauge has fluctuated between 10 and 80 for the last 15 years. It also tends to stay low during most of the time, and the spikes to the upside are short lived. This makes it ideal for trading strategies.
This strategy is based on the idea that sooner or later, the volatility will come back to the market and the VIX will go up. It must be used when the VIX level is below 20.
In this strategy, the trader takes a long position on the VIX (buys the instrument). The initial purchase must not be higher than 33% of the capital dedicated to the VIX trade.
If the VIX goes up 20% from the price when the position was opened, the trade should be closed and a 20% profit secured.
If the VIX goes down to the 15 level (remember the initial position was started at a level between 15 and 20), the trader must add to the position with an amount equal to the initial purchase. Now the average purchase price will become lower. When the VIX rebounds and the trade reaches a profit equal to 20% of the total purchase amount, the trader should exit the position and take the profit.
In the rare event that the VIX keeps going down, the trader keeps the last third of the allocated budget to purchase another stake in case the VIX reaches 10, to lower the average entry price even more. If the trader has additional funds, he can increase the position with an even larger size, since buying the VIX at 10 is a very rare opportunity and the rebound is nothing short of guaranteed. The inevitable return of volatility will make the trade profitable soon enough, and profits are to be taken after a 20% target is reached.
As a general rule, the VIX is a buy and wait at any level below 15. The lower it goes, the more a trader can add to his/her position in order to make a larger and faster profit. Volatility cannot drop to zero, and it cannot stay low forever. Sooner or later something will happen that will make investors more risk averse.
This strategy is similar to the Bullish strategy, but in an inverse way. This strategy calls on shorting (selling) the VIX when the index is above 40 because volatility always goes down after a while.
The Bearish VIX Strategy should be implemented in steps, just like the bullish one. The initial position starts at any level above 40, and in case the volatility continues to go up, the position size should be increased to make the break-even level higher. A good level to double the size would be 60, and in the unlikely situation when the VIX reaches 80, the size of the short trade can be greatly increased, because volatility cannot stay that elevated for too long.
This strategy can be used only during periods of high volatility, as the VIX doesn't go above 40 too often. The big advantage of the bearish strategy is the fact that volatility never stays high for too long, so making a profit on the way down happens much faster than on the way up.
Both strategies are based on the idea of averaging your position to a better level if the price moves against you, so any rebound in your direction would overcompensate for the initial loss. The amounts used and how often one increases the position is up to each trader to decide, but it is important to have sufficient funds for increasing the position in case it will be necessary.
We wish you good luck with trading the Volatility 75 Index!
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