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Three Ways to Trade the VIX

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These vehicles allow you to take positions without owning the underlying.

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It seems as if many readers are interested in how to trade the VIX. This question really boils down to 2 separate issues: strategies and trading vehicles.

Since I've talked about strategies repeatedly in this space in the past, I thought I'd offer a quick summary of trading vehicles today.

First off, it's not possible to trade the VIX directly. The VIX index (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.

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 consist of 2 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 5-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).

For some additional reading on these subjects, readers are encouraged to check out Ten Things Everyone Should Know About the VIX and Lost in Translation: VXX and VXZ.
No positions in stocks mentioned.

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