Can You Buy the VIX? How to Get VIX Exposure

The Cboe Volatility Index, widely known as the VIX, serves as a measure of market sentiment, often called the “fear gauge.” This index provides insight into the market’s expectation of future volatility. Many individuals are interested in understanding how they can gain exposure to this important indicator. This article explores methods for investors to gain exposure to the VIX.

The VIX Index

The VIX is a real-time market index that quantifies the market’s expectation of 30-day forward-looking volatility. It is derived from the prices of S&P 500 index options, aggregating their weighted prices across various strike prices. The VIX calculation incorporates options with expiration dates typically ranging from 23 to 37 days.

The VIX itself is a theoretical calculation and not a directly tradable asset like a stock or bond. Investors cannot directly buy or sell the VIX index because it is a statistical measure of implied volatility, not an underlying security. This necessitates indirect methods for gaining exposure.

Gaining Exposure Through VIX Futures

VIX futures contracts offer a direct way to speculate on or hedge against future changes in the VIX. These are standardized agreements to buy or sell the VIX at a predetermined price on a future date, primarily traded on the Cboe Futures Exchange (CFE).

VIX futures typically trade at a premium to the spot VIX, a condition known as contango, especially during periods of low market volatility. Conversely, during times of high volatility, futures prices may trade at a discount to the spot VIX, a situation called backwardation. Each VIX futures contract has a multiplier of $1,000, meaning a one-point movement translates to a $1,000 change in value. These contracts are cash-settled, eliminating the need for physical delivery of any asset.

To trade VIX futures, individuals must open a futures brokerage account. These accounts often require higher margin requirements compared to traditional stock trading accounts due to the leveraged nature of futures contracts. Margin requirements generally represent a percentage of the contract’s notional value.

Gaining Exposure Through VIX Options

VIX options provide another avenue for gaining exposure to expected volatility, offering the right, but not the obligation, to buy or sell VIX futures contracts at a specific price on or before a certain date. These options are also traded on the Cboe. VIX options allow investors to take a position on the anticipated direction of volatility, whether higher through call options or lower through put options.

The underlying asset for VIX options is the VIX futures contract, not the spot VIX index itself. Key characteristics include strike prices, which are the predetermined prices at which the option can be exercised, and expiration dates. VIX options are European-style, meaning they can only be exercised at expiration, and are cash-settled based on a special opening quotation of the VIX index on the settlement date. The contract multiplier for VIX options is typically 100, meaning a one-point movement represents a $100 change per contract.

Trading VIX options requires an options-enabled brokerage account, which involves an approval process to ensure the investor understands the associated risks. Brokerage firms often categorize options trading into levels, with VIX options generally falling into higher levels due to their complexity and cash-settlement mechanism. Options premiums are influenced by factors such as time until expiration, the current VIX level, and the expected volatility of the VIX itself.

Gaining Exposure Through VIX-Linked Exchange-Traded Products

VIX-linked Exchange-Traded Products (ETPs), including Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs), offer a more accessible way for individual investors to gain VIX exposure. These publicly traded securities track movements in volatility by holding portfolios of VIX futures contracts, not the VIX index directly.

These products typically track VIX futures indices. A characteristic of VIX ETPs is “roll yield.” Because VIX futures contracts have expiration dates, ETPs must continuously “roll” their positions by selling expiring near-month contracts and buying longer-dated contracts to maintain consistent exposure. In a contango market, where longer-dated futures are more expensive, this rolling process can lead to a negative roll yield, eroding the ETP’s value over time.

This continuous rolling and frequent contango contribute to “decay,” where the ETP’s value can decline even if the spot VIX remains stable or rises slightly. Consequently, VIX ETPs are generally not suitable for long-term buy-and-hold strategies. Some VIX ETPs offer leveraged or inverse exposure. Trading VIX ETPs is similar to trading stocks, requiring a standard brokerage account, making them relatively easy to access.