Friday, February 19, 2010

Introduction to VIX, VIX Futures, and VIX options

VIX is the implied volatility of S&P 500 index options.
It is considered one of the best barometers of investor sentiment and market volatility.
The VIX is often called the fear index. When it is high investor sentiment is toward increased volatility and corresponding higher risk. A lower number indicates investors are less concerned about the market and anticipate low volatility.
Fear and greed are the two most powerful emotions stock investors must acknowledge as driving the market over the short-term.

• 1993 - The VIX Index is introduced in a paper by Professor Robert E. Whaley of Duke University.
• 2004 - On March 26, 2004, the first-ever trading in futures on the VIX Index began on the CBOE Futures Exchange (CFE).
• 2006 - VIX options were launched in February 2006

Vix Options
VIX options are the first exchange-traded options that give individual investors the ability to trade market volatility.
Trading VIX options can be a useful tool for investors wanting to hedge their portfolios against sudden market declines, as well as to speculate on future moves in volatility.
For experienced traders VIX options can be used for volatility arbitrage.

The CBOE website has detailed information about the VIX index and VIX options.

I would also like to mention VXX and VXZ which are exchange traded notes designed to track the S&P 500 VIX Short-Term Futures Index and the S&P 500 VIX Mid-Term Futures Index respectively. These products offer individual investors a daily rolling long exposure to VIX futures contracts.

These are the building blocks of my trading ideas.

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