Trading Volatility
Posted by admin on 3rd March 2010
If you are interested in trying to trade the potential for a change in volatility (increase or decrease), I would stay away from VIX options. The reason is because VIX options trade European style, which means they can only be exercised on the option expiration date. As a result, this eliminates the potential for arbitrage and makes profiting off the calls and puts very difficult. Keep in mind that much of the expected movement is already factored into the price of the options.
Instead, I suggest you take a look at VXX, which is a volatility based ETF (exchange traded fund). Actually, its an ETN (exchange traded note) but the difference is insignificant for our purposes. It’s designed to go up when the VIX moves higher and go down as volatility decreases. A sharp move up in the VIX could lead to fast gains for VXX.
However, there are no options on VXX. My point is that if you are interested in trading VIX movements, VXX is a good way to go.
-Samir
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