Volatility Index?

Hi there,

I’d love to know if you are planning on adding volatility index like VIX to the platform? I think would be good to have exposure to such index in case we see new lockdowns.

Thanks!

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The VIX is interpreted as annualized implied volatility of a hypothetical option on S&P500 with 30 days to expiration, based on the prices of near-term S&P500 options traded on CBOE.

There is no VIX index which can be traded as it is an implied result of current pricing. There are ETFs which aim to replicate the VIX index but they do not produce a perfect result. Some are short-dated with losses compounding over every trading session and others are long-dated and therefore less volatile.

That aside, these ETFs are all US based with no KIIDs so are not available to retail investors in the UK and so are not likely to be added by Freetrade anytime soon.

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Thank you for explaining this, I wasn’t aware of these details. Appreciate it!

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I trade VIX on IG, poster is right, you can’t trade the VIX you see quoted, but can trade VIX futures and there are a few instruments based on the VIX and VIX futures. The VIX futures most of the time were in a situation where the current month and closer month future prices were lower than prices of months further out.

This meant for a long time that being long VIX futures was a consistent money loser as every month your futures contract expires and to keep the position you have to ‘roll’ or re buy the next months contract which is at a higher price than the preceding month.

The price of next months contract does not necessarily have to be higher than current months, it can in fact be lower, it just depends on expectations for the future, if people expect volatility to be significantly higher in 6 mths the future month prices may be higher. A similar thing happened in Oil futures markets when prices went negative for current month futures due to lack of storage but would have been $30ish for the future contact 6 mths away.

The two key words that describe the state of future months priced higher than current and vice versa are contango and backwardation.

If you are long a future in contango and it stays in contango you will lose money in perpetuity as every month you have to close current month and buy next months at a higher price. You could make money in the short term of course by the price of the underlying instrument rising significantly and raising prices of all futures contracts. But you have to be right quite quickly or the amount you lose through the contango destroys your capital. I learnt this when I bought current month futures for VIX in Dec 2019 and rolled over twice before closing position in early Feb 2020, mere weeks before an ATH lol.

The VIX was in backwardation recently(it may still be i haven’t looked) when markets were crashing and expectations were that at some point in the next few months VIX will be lower than in current months, in this situation you would make a profit every month through selling high and buying the same amount of the same instrument at a lower price.

Various ETF like products have been set up to cater to investors trying to play the VIX and the contango/backwardation dynamics of futures. Many of the long VIX ETN’s have absolutely horrendous long term returns. It is worth researching what an ETN is if you are looking at VIX, my understanding is they are a promise to mirror performance of an instrument without necessarily holding that instrument, kind of like a CFD but with a big institution providing the ETN.

Short VIX ETN’s also exist/existed which were designed to take advantage of the near perpetual contango and pick up the roll yield every month. These drew in huge amounts of money and many of them made money consistently. Some were crushed during the massive run up in VIX earlier in the year. Some short VIX instruments could be described with the analogy of “picking up pennies in front of a steamroller”. Some tickers off the top of my head would be TVIX, UVXY, SVXY which are either long or short VIX instruments with a mix of future expiration.

I would see VIX as performing a specific function or hedging against disaster rather than an arm of a returns strategy, and I’d advise maximum caution trading VIX instruments. If you do intend to use the demo account first as the mechanics are not the same as stocks.

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I had a position recently in the Lyxor S&P 500 VIX Futures Enhanced Roll UCITS ( VOOL ) ETF. Traded on the German stock market and available at other brokers.