Important Information

You are visiting the international Vantage Markets website, distinct from the website operated by Vantage Global Prime LLP
( www.vantagemarkets.co.uk ) which is regulated by the Financial Conduct Authority ("FCA").

This website is managed by Vantage Markets' international entities, and it's important to emphasise that they are not subject to regulation by the FCA in the UK. Therefore, you must understand that you will not have the FCA’s protection when investing through this website – for example:

  • You will not be guaranteed Negative Balance Protection
  • You will not be protected by FCA’s leverage restrictions
  • You will not have the right to settle disputes via the Financial Ombudsman Service (FOS)
  • You will not be protected by Financial Services Compensation Scheme (FSCS)
  • Any monies deposited will not be afforded the protection required under the FCA Client Assets Sourcebook. The level of protection for your funds will be determined by the regulations of the relevant local regulator.

If you would like to proceed and visit this website, you acknowledge and confirm the following:

  • 1.The website is owned by Vantage Markets' international entities and not by Vantage Global Prime LLP, which is regulated by the FCA.
  • 2.Vantage Global Limited, or any of the Vantage Markets international entities, are neither based in the UK nor licensed by the FCA.
  • 3.You are accessing the website at your own initiative and have not been solicited by Vantage Global Limited in any way.
  • 4.Investing through this website does not grant you the protections provided by the FCA.
  • 5.Should you choose to invest through this website or with any of the international Vantage Markets entities, you will be subject to the rules and regulations of the relevant international regulatory authorities, not the FCA.

Vantage wants to make it clear that we are duly licensed and authorised to offer the services and financial derivative products listed on our website. Individuals accessing this website and registering a trading account do so entirely of their own volition and without prior solicitation.

By confirming your decision to proceed with entering the website, you hereby affirm that this decision was solely initiated by you, and no solicitation has been made by any Vantage entity.

I confirm my intention to proceed and enter this website Please direct me to the website operated by Vantage Global Prime LLP, regulated by the FCA in the United Kingdom

By providing your email and proceeding to create an account on this website, you acknowledge that you will be opening an account with Vantage Global Limited, regulated by the Vanuatu Financial Services Commission (VFSC), and not the UK Financial Conduct Authority (FCA).

    Please tick all to proceed

  • Please tick the checkbox to proceed
  • Please tick the checkbox to proceed
Proceed Please direct me to website operated by Vantage Global Prime LLP, regulated by the FCA in the United Kingdom.

×

Are you long or short on indices?

Trade Indices Now >
Long Or Short On Indices?
View More
SEARCH
  • All
    Trading
    Platforms
    Academy
    Analysis
    Promotions
    About
  • Search
Keywords
  • Forex Trading
  • Vantage Rewards
  • Trading Fees
  • facebook
  • instagram
  • twitter
  • linkedin
  • youtube
  • tiktok
  • spotify
A Guide to Trading in Volatile Markets

TABLE OF CONTENTS

A Guide to Trading in Volatile Markets

A Guide to Trading in Volatile Markets

Vantage Updated Updated Thu, 2023 August 24 06:15

What is the VIX? 

The “VIX” is the CBOE Volatility index that measures the market’s expectation of volatility over the coming 30 days in the S&P 500 index — the benchmark stock market in the US, based on index options. Originally published in 1993, it is produced by the Chicago Board Options Exchange (CBOE).  

In simple terms, volatility is the statistical tendency of a market to go up or down sharply within a certain period of time. It is measured by standard deviations – that is, how much a price deviates from what is expected, which is generally its mean. 

The VIX is often known as Wall Street’s “fear gauge” as investors use it to identify investor sentiment and the overall health of the entire US equity market.  

In essence, if the VIX stays below 20, then market participants’ worries would be considered moderate. However, if it goes above that, people could sense there are bigger things on the horizon to fear. 

How does the VIX work? 

The VIX index is the most closely watched gauge of implied volatility of stock markets. It is worth digging into what that means.  

  • Implied volatility represents the current market pricing based on its expectation for movement over a certain period of time. This forward-looking figure allows a trader to calculate how volatile the market will be going forward.  
  • The VIX can help investors estimate the implied move and range for the S&P 500 index with a significant degree of confidence in the next 30 days. This can be extremely useful for calculating stop distances and position size. 

To understand the mechanics, the VIX reflects the cost of buying short-term options on the S&P 500, which pay off if stocks move significantly over the next 30 days. That means the VIX does not track the underlying price of the stock market itself.  

The index uses live prices of S&P 500 options.  

  • Options are derivatives that give the holder the right to buy or sell the S&P 500 at a specific price, which is known as the strike price.  
  • This includes standard CBOE S&P 500 options, which expire on the third Friday of every month, plus weekly S&P 500 options that expire every Friday.  
  • The option must have an expiry date between 23 and 37 days to be considered for the VIX index.  

The combination of the weighted prices of multiple S&P 500 options over a wide range of prices allows traders to understand where the market is willing to buy and sell the S&P 500 index. These values will then estimate the future volatility of this benchmark stock market.  

Open a live account with Vantage today and get started with trading indices contracts for differences (CFD). Vantage offers a user-friendly trading platform, competitive spreads, and access to a wide range of global indices, making it an ideal choice for traders looking to explore the world of CFD trading. 

The values behind the VIX 

Calculated by prices in options, a higher VIX reading signals higher stock market volatility, while low readings mark periods of smaller volatility.  

This implies the VIX has a strong negative correlation with the performance of the stock market.  

  • When the VIX rises, it is possible that the S&P 500 will fall due to increased uncertainty. 
  • Conversely, if the VIX falls, the S&P 500 is more stable and there are less fears in markets.  

Remember that volatility can remain low, while it is still possible for the market to drop in value. Volatility measures the change in movement in price; it is not a measure of the price of the S&P 500 itself. The direction of change is not important, but rather how much the market has moved.  

Here’s how you can read the VIX: 

  • Generally, a reading below 20 indicates market stability, whereas  
  • A level above 30 is deemed to be elevated and signals heightened volatility  

For the record, the all-time intraday high was 89.5 which occurred in 2008.  

Comparing the actual VIX levels to those that might be expected is helpful in identifying whether the VIX is “high” or “low” and can provide clearer indications of what the market is predicting about future realised volatility. 

Why trade the VIX? 

volatility index Vix

Due to its strong relationship with stock markets, the VIX is typically used to hedge against a falling stock market or to make a bet on extreme moves in prices. Holding a VIX position might also offer diversification with stock positions in a portfolio. 

The ‘fear index’ allows investors to generate potential returns from the expected volatility levels of the S&P 500 index. Of course, fear has its origins in investor psychology, as fear in the market always causes very sharp price action, which occurs during panics.  

The greater the extent of the panic, the more sharply the VIX rises, as investors anticipate price declines from stock markets. Trading on the VIX also allows you to make potential returns when the trend reverses and positive sentiment returns to the market.  

This is why VIX trading has become particularly popular with traders trying to find the highs and lows of euphoria and panic and with traders playing strategies based on forecasts of events that could affect the economy. 

How to trade the VIX? 

When you trade the VIX, similar to other indices, you aren’t trading an asset directly because there is no physical asset to buy or sell. Instead, you trade the VIX by using derivative products that are designed to track the price of the volatility index. 

It is also important to remember that trading volatility implies you’re not exclusively concerned with whether the stock market or S&P 500 prices rise or fall. 

There are two positions you can take. These depend on your expectations of the level of volatility and not the direction of the rise or fall in the price of the S&P 500: 

  • A long position – you think fear and uncertainty will rise and push the S&P 500 lower, perhaps due to an economic or political announcement.  
  • A short position – if you short the VIX, you assume that the S&P 500 will rise.  

Diminished volatility is typically observed during periods of market stability and minimal uncertainty, coupled with consistent economic expansion, which often results in upward movement of stocks and a decrease in the VIX. 

Contrarian traders could also potentially benefit from adopting a short position during time of extreme fear, as they anticipate a subsequent improvement in market sentiment over time.  

Conclusion 

Fear and greed are the two key ingredients that feed volatility. They are the real foundations of price action when volatility increases and can occur on any time frame.  

Watching the VIX gives us an idea of what markets think may happen to global markets in around one month’s time. Trading the VIX via CFDs enables us to navigate this volatility and potentially seize opportunities on the abrupt price action that may ensue.  

Open a live account with Vantage today and start trading VIX index CFDs. 

  • vantage academy open account

    Open Trading Account

    Discover the endless trading possibilities with our cutting-edge platform, designed to empower both beginners and seasoned traders alike.

  • vantage academy app

    Download Vantage App

    Trade on the go with the Vantage All-In-One Trading App, where smooth execution and market access come together in the palm of your hand.

  • vantage academy start trading

    Start Trading

    Are you an existing user? Login to your account to start trading 1,000+ products including forex, indices, gold, shares and more.