This is the Only Way to Trade the VIX

The CBOE Volatility Index (VIX), also known as the "fear index," measures stock market volatility based on premiums paid for option on the S&P 500 index. It is a complex calculation, but what traders need to know is that VIX rises when prices are falling rapidly, because options premiums tend to rise just as rapidly. Gains in option premiums lead to higher values of VIX. When markets are rising steadily or moving sideways in a consolidation, options premiums drop, as does the value of VIX.

In some ways, volatility seems like it should be more tradable than price. In Bollinger on Bollinger Bands, analyst John Bollinger observed that volatility is cyclical and "high volatility begets low, and low volatility begets high."

We are now at a point of low volatility, which means we will inevitably see a return to high volatility at some time in the future. Recently, VIX fell to its lowest level since the summer of 2007, leading many traders to wonder what would happen if they bought low volatility.

From the chart below, it looks like they would eventually be rewarded with profits, because after reaching low levels, VIX does rise.

In reality, trading VIX is not so straightforward. VIX is a "wasting asset" based on options and traded with derivatives that have expiration dates. Many derivatives expire worthless and that creates a downward bias in the expected returns.  (more)

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