Can You Buy VIX? How to Invest in the Volatility Index

The Cboe Volatility Index, known as the VIX, is a real-time market index reflecting the market’s expectation of future volatility. The VIX is a measurement, not a tradable asset like a stock, and cannot be bought or sold directly. Investors gain exposure to VIX movements indirectly through specialized financial products. These instruments track or derive value from the VIX, offering avenues to participate in volatility-related market dynamics.

What the VIX Index Represents

The VIX measures the implied volatility of S&P 500 index options over the next 30 days. Its calculation aggregates the weighted prices of S&P 500 index call and put options, providing a forward-looking measure of expected market fluctuations.

A higher VIX value indicates greater expected market volatility, often associated with increased market uncertainty or investor fear. Conversely, a lower VIX value suggests expectations of less volatility and a more stable market. The VIX is a forward-looking indicator, forecasting future volatility, and is often called the “fear gauge” because it tends to spike during market stress.

Understanding VIX-Related Investment Products

Investors gain exposure to the VIX through various financial products linked to its movements, primarily derivatives.

VIX Futures Contracts

VIX futures contracts are agreements to buy or sell the VIX at a predetermined price on a future date. These contracts are priced based on the market’s expectation of the VIX’s value at their expiration. VIX futures serve as the underlying asset for many other VIX-related investment products.

VIX Options Contracts

VIX options contracts give the holder the right, but not the obligation, to buy or sell VIX futures contracts at a specific price by a certain date. These options are on VIX futures, not the spot VIX index. Investors use calls to bet on rising VIX futures prices and puts for falling prices. VIX options are European-style, meaning they can only be exercised at expiration, and are cash-settled.

Exchange-Traded Products (ETPs)

ETPs linked to VIX futures offer an accessible way for investors to gain VIX exposure without directly trading futures or options. These include VIX Exchange-Traded Funds (ETFs) and VIX Exchange-Traded Notes (ETNs).

VIX ETFs invest in a portfolio of VIX futures contracts, rolling them over as they approach expiration. Short-term VIX ETFs focus on front-month and second-month futures contracts for near-term volatility exposure. Mid-term VIX ETFs hold futures contracts with longer maturities, usually from the fourth to the seventh month.

VIX ETNs are unsecured debt instruments issued by financial institutions. They promise a return linked to the performance of a VIX futures index. ETNs carry credit risk, as their performance is tied to the issuer’s financial health, unlike ETFs which hold underlying assets.

Important Considerations for VIX Product Performance

VIX-related investment products, especially ETPs, have unique performance characteristics due to VIX futures.

VIX Futures Curve

The VIX futures curve illustrates the prices of VIX futures contracts across different expiration dates. This curve can be in “contango,” where longer-dated futures are priced higher than nearer-dated ones, or “backwardation,” where longer-dated contracts are cheaper.

Roll Yield

Roll yield significantly impacts the performance of VIX ETPs that consistently roll their futures positions. When the market is in contango, common for VIX futures, rolling contracts forward results in a negative roll yield. This means that as futures are sold and new, more expensive contracts are bought, the ETP can experience a drag on performance. Conversely, if the VIX futures curve is in backwardation, a positive roll yield can occur, as expiring contracts are more expensive than new contracts purchased.

Time Decay

Time decay influences VIX options and, indirectly, VIX ETPs. Options lose value as they approach expiration. This characteristic can affect the pricing of VIX futures and the ETPs that hold them.

Tracking Error

Tracking error is another consideration, as VIX ETPs often do not perfectly track the spot VIX index. This divergence can result from factors such as the futures roll process, management fees, and market inefficiencies.

Leveraged and Inverse ETPs

Some VIX ETPs offer leveraged or inverse exposure, designed to provide multiples (e.g., 1.5x, 2x) or the opposite (e.g., -1x) of the daily performance of a VIX futures index. These products are intended for short-term trading strategies. Their daily rebalancing and compounding can lead to significant performance decay over longer periods, especially in volatile markets. They are not suitable for long-term buy-and-hold investing.

Accessing VIX-Related Products Through a Brokerage

To invest in VIX-related products, an individual needs to open a brokerage account. This process involves an online application where personal, employment, and financial information is provided. Once approved, the account must be funded through methods like electronic transfers from a bank account.

Trading options and futures, including those related to the VIX, often requires specific permissions from the brokerage firm. Investors need to demonstrate an understanding of the complexities and potential for loss associated with these instruments. Brokerages have an application process for these permissions, which may involve evaluating the investor’s trading experience and financial situation.

Placing an order for an ETP, futures contract, or options contract involves searching for the specific product by its ticker symbol on the brokerage’s platform. The investor then selects the order type, such as a market order or limit order, and specifies the quantity.

Trading futures and certain options strategies may involve margin accounts, which allow investors to use borrowed funds. Understanding the specific margin requirements set by the brokerage and regulatory bodies is essential. For instance, certain day trading activities may require a minimum account net liquidation value, such as $25,000.