The Yajnik Letter

From conversations I have had recently, it seems that many individuals are interested in how to trade the VIX (CBOE Volatility Index), which is the ticker symbol for the volatility index that the Chicago Board Options Exchange (CBOE) uses to calculate the implied volatility of options on the S&P 500 index (SPX) for the next 30 days. This question really boils down to two separate issues: strategies and trading vehicles.

Since I have talked about strategies in the past, I thought I would offer a quick summary of trading vehicles today.

First off, it is not possible to trade the VIX directly. Formally known as the CBOE Volatility Index, the VIX calculates market expectations of 30 day implied volatility for S&P 500 index options. The VIX (sometimes referred to as the cash or spot VIX) is a statistic that the CBOE calculates and disseminates every 15 seconds during the trading day. While widely disseminated, this statistic is not available for purchase.

Fortunately, there are a number of VIX derivatives that allow traders to take positions on the VIX without owning the underlying. In no particular order, they are:

1. VIX options – these include standard options as well as VIX binary options
2. VIX futures – standard VIX futures contracts have a contract size of 1000 times the VIX; the recently added mini-VIX futures have a contract size of 100 times the VIX
3. VIX ETNs – currently consists of two exchange traded notes: the iPath S&P 500 VIX Short-Term Futures ETN (VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ). The former targets one month VIX futures and the latter targets five month VIX futures.

In addition to VIX products, one can always trade options on the SPX (or SPY). A long VIX position is very similar to a long SPX straddle (or strangle); a short VIX position is very similar to a short SPX straddle (or strangle.)

Hope this helps. As always, if you have any questions, don’t hesitate the post a comment or send me an e-mail to customerservice@yajnikletter.com. Also, check out the following articles that I came across today:

• Read here to understand Warren Buffet’s concerns over the future of the Greenback (aka US Dollar).
• So, what is Warren Buffet buying and selling these days? Check it out here.
• Has China entered bear market territory? Will it continue to drag the rest of Asia down with it? Read this article to get answers to these important questions.
• I am always looking for ways to improve my trading, whether it’s the mental or the physical aspects of it. Read these 10 rules which have been adapted from applied sports psychology.
• Read here how you can cash out of your IRA with zero penalty.
• “Dr. Doom” Roubini says we are headed for another recession. So, has the recent rally hit a wall? Read about it here.

-Samir