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- Weak US jobs data in July and higher interest rates in Japan sent the VIX price soaring
You may have noticed unusually volatile fluctuations in the value of your investment or pension portfolio over the past month.
The FTSE 100 has largely recovered ground after starting August following other major markets with a sharp sell-off that wiped $6.4 trillion (£5.03 trillion) off global share prices.
Most experienced investors will tell you that the best policy during a sudden sell-off is to stay calm – selling is often the quickest way to lose money.
But investors also have the opportunity to profit from intense episodes of volatility.
The VIX aims to track the expected volatility of the S&P 500 index, based on data from options contracts.
What is the VIX?
The CBOE Volatility Index, or VIX, acts almost as a barometer of investor confidence.
Launched in 1993, this widely watched index aims to track the expected volatility of the S&P 500 index, based on data from options contracts.
There are two types of options: a “call,” which gives the holder the right to buy a stock (or other asset) at a fixed price in the future, and a “put,” which gives the right to sell.
The index measures the market’s expectation of how much the price of major stocks will move over the next 30 days.
When the VIX is high, investors expect volatility and large price swings in the market, which is common in times of uncertainty.
When the VIX is low, investors expect minimal price movements and market stability.
How can UK investors invest in the VIX?
Investment opportunities in or around the VIX are very limited.
One option is through VIX futures, which according to Sam North, market analyst at eToro, might not be for all investors “as significant margin is needed to trade them.”
David Morrison, senior analyst at Trade Nation, says the best way for Britons Investors can speculate on the VIX through VIX exchange-traded funds (ETFs).
North explains that ETFs allow investors to track the VIX, thus providing traders with exposure and a tool “to hedge against future volatility in the markets.”
He continues: ‘On the other hand, some investors will use the VIX simply as a proxy for their other investments.
‘For example, a high VIX might indicate a good time to buy put options on the S&P 500 or other indexes, or to reduce exposure to stocks, while a low VIX might suggest a more stable market where increasing stock positions could be beneficial.’
eToro has ETFs that offer exposure to the VIX, such as UVXY and VXX. It also offers VIX futures.
While at Trade Nation you can trade the VIX as a spread bet or CFD.
What risks should investors consider before investing in the VIX?
It is clear that investors need to be wary of VIX volatility when purchasing an ETF.
According to North, investors should also consider liquidity.
He said: ‘While some ETFs may have good liquidity, not all do and so when volatility increases, so does the spread, meaning investors may not always be able to get in and out at their desired prices.
“If the S&P rises, VIX-related assets typically fall, and vice versa. These factors make VIX investing particularly complicated and require a nuanced understanding of futures markets and volatility dynamics.”