Thanks to the advent of a slew of websites and apps, trading the stock market has never been easier. Indeed, one of the themes of the financial market of the past few months has been the way that retail investors have impacted the financial market as a whole. However, retail investors can only be successful if they fully understand all of the aspects of the financial market and its various opportunities. This includes understanding the VIX, including what it is and the VXX vs VIX.
What is the VIX?
The VIX is the volatility index of the stock market. It is a measurement of what the market thinks will happen in the near term in terms of overall stock changes, measuring out the projected volatility for a 30-day period. The higher the VIX, the more volatility stock market traders can expect. This measurement is very important for traders, as it can impact their overall strategy, when they buy, and when they sell. It can also have a significant impact on the options market.
During times of high volatility, the VIX will rise. Its high over the past few years was March 20, 2020 – just as the COVID crisis was hitting its peak – when the VIX hit 66.04. It has since come down significantly; as of this writing, it has ranged between $19.94 and $$28.89 over a one-month period. This is relatively within its historical norms.
This differs from the VXX in that the VXX is an exchange-traded note that is based on the functioning of the VIX. Thus, the VXX is a product that moves based on volatility, and it represents just one of many ways that individuals can trade the VIX.
How Can You Trade the VIX?
In addition to the VXX, there are a series of ways that an individual can trade on the volatility of the stock market. These include a variety of ETFs, or exchange-traded funds, that will rise and fall based solely on the performance of the VIX. There are a variety of ETFs like this out there, including VIXM, XVZ, VIXY, and more.
It’s also worth noting that you can short the VIX. This means that, just like any other stock, you can bet against the VIX rising, meaning you believe the market will be entering a period of success and stability.
Trading the VIX is important for the diversification of your portfolio. These funds typically perform opposite of the market as a whole, meaning they can help you absorb some of your losses during a bear market. Since there are so many options and ETFs for trading the VIX, you can select the one that best suits your needs and interacts with your brokerage firm. Just make sure that the firm has a track record of success and a low expense ratio. This helps to minimize the losses you take to management or investor fees.
VIX investing is more complicated than purchasing a regular stock. Make sure you fully understand the potential risks and rewards before making an investment.