VIX Trading

The CBOE volatility index, VIX has opened up some new dimensions of investing. This index, sometimes called the “Fear” index, somewhat directly tracks the emotional state of the market. If the market is on an upswing and optimistic this index is relatively low, however when the bear bites and people are talking about the imminent market crash it soars.

You can’t directly invest in the VIX, however there are some substitutes that are fairly close–specifically VIX options, the VXX ETN (similar to an ETF), and VIX futures. I haven’t traded the futures, but I have traded the options and the VXX. Like most financial instruments there are conservative ways to use these and speculative. They can be used as portfolio insurance–to hedge against a big crash, or to profit from irrational fear, or many other uses.