Futures And Options

Multiple Ways to Profit with the VIX

The VIX is a measure of expected future volatility calculated by the Chicago Board Options Exchange (CBOE). It is quoted in percentage points and roughly translates to the expected movement in the S&P 500 over the next 30 days, which is annualized.

For example, a VIX reading of 16 implies an expected annualized change of 16% over the next 30 days. Ok, enough about this nitty-gritty stuff. How can investors/traders profit from the VIX?

Versatile VIX

The VIX is more than just an index; it’s an indicator, possibly one of the best ones in the business. There’s a reason VIX is called the fear gauge. Personally I use the VIX as a “lack of fear” gauge. Low VIX readings are synonymous with complacency and complacency almost always spells trouble.

On April 24, 2011 the ETF Profit Strategy Newsletter warned that: “With the VIX at a 46-month low it is prudent to keep any long positions on a short leash.”

One day later, the ETF Profit Strategy Newsletter pointed out that the VIX issued a sell signal for stocks. Such a sell signal triggers when the VIX closes above the lower Bollinger Band after having closed below the lower Bollinger Band previously.

A couple days after the sell signal the S&P topped at 1,370 and fell as low as 1,258.

You don’t have to trade the VIX to make money with the VIX. Most of the time the movements in the VIX are directly correlated to that of the S&P and the market in general.

The advantage of trading the S&P 500 is that there are many more vehicles to do so. One can trade the S&P 500 SPDR (NYSEArca: SPY), futures, options and a variety of leverage/inverse ETFs like the Ultra S&P ProShares (NYSEarca: SSO) and UltraShort S&P 500 ProShares (NYSEArca: SDS). Aggressive traders tend to prefer the VIX because of its higher daily percentage moves.

Restricted VIX

Prior to 2004 when VIX futures contracts became available, and 2006 when VIX option contracts became available, it was impossible to directly trade the VIX. Options still remain a popular strategy to benefit from movements in the VIX (more about futures in a moment).

Commodity Futures and Options Trading- Money Management, Risk and ...

Possibly the most important aspect to get right in trading is survival. This is number one. Without surviving the bad times we are gone, with no hope. Money management and risk may sound like boring subjects, but read on to see how exciting they can be once you learn the concrete reasons and logic for their use. You may never trade the same way again! So this means that half of the money must be lost by somebody if half are winners. Or 95% of the money is lost by commodity traders who give it to 5% of the prosperous others. With a zero sum game, there MUST be many losers, and some big losers if there are big winners. If the CFTC did an audit of a commodity brokerage firm , they could well EXPECT to come in and find brokers with customer accounts that are doing poorly. Brokerage commissions and profits won by the best traders must come from somewhere. This is normal and the way the futures markets (and stock markets to some degree) have worked for over a century. As long as everything was done legally and ethically, there is no problem with customers losing. There is always a winner and loser in commodities. The same with Las Vegas. Vegas is also a negative sum game, given the house odds. The casino house is equivalent to the best commodity traders. (and brokerage houses, of course) Interestingly enough, theoretically, an exception is the stock market. You could have 100% winning traders if everyone were long and all the stocks kept going up. Even the commissions could be covered. But this is never the case in the real world. There is probably no difference in losing statistics for stock or commodity speculators. It’s a strange arena, this trading. You simply must remember that it is YOU against the competition. And there are sharp traders out there. Pure capitalism. You must make it as difficult as possible for them to take your commodity account money away. Bottom line: When your commodity trading method’s accuracy is low by design, you MUST let your profits run bigger than losses and limit your losses in order to be profitable to survive over the long haul. You should also never risk more than 5% to 7.5% on any one trade. When trading accuracy is high by design, you can then let the profit to loss ratio get closer to 1:1, take quicker profits and slower losses and risk up to 10% a trade. Remember that your goal is eventually to risk 5% or less a trade, as many professionals do.

Futures And Options

Futures & options for dummies

Options, futures and other derivatives

Futures & options

Futures and Options, Self-Study Workbook