You Can Not Buy a Volatility Index
Volatility indices have become quite popular in the recent years. Especially the VIX (CBOE Volatility Index) has been frequently mentioned in media, often as the so called "fear index". Many people wonder if they can actually buy indices like the VIX, especially when they are very low and it is obvious to everybody that they must go up sooner or later.
Unfortunately, in general, volatility indices are not tradable.
But you can trade them indirectly – see the rest of this page.
Why You Can Not Buy a Volatility Index
A volatility index such as the VIX is in fact just a number – a kind of statistic that an exchange (in case of VIX it is Chicago Board Options Exchange or CBOE) publishes to provide information about what is going on in the market.
Being just a market statistic, a volatility index is not unlike other numbers like daily stock trading volume (you can't buy or sell the trading volume number) or a stock index like Dow Jones Industrial Average or S&P500. Although many people are not aware of it, it is not possible to buy the Dow or S&P500 (at least not directly – of course you can buy a basket of all stocks in the index). The indices are just numbers.
Can You Buy Something Similar to a Volatility Index?
Fortunately, it is possible to get an exposure to the changes in value of volatility indices by buying futures, options, or exchange traded products, in the same way as you can buy futures, options, or ETFs on the stock indices (for example the ES futures or the SPY ETF on the S&P500).
In case of VIX you can buy:
- VIX futures
- VIX options
- VIX exchange traded products (for example ETFs/ETNs known under the ticker symbols VXX, VIXY, or UVXY)
Different futures, options, and ETPs provide different kinds of exposures and even different directions (some ETNs like the XIV are short VIX).
There are a few problems with these instruments – they do not replicate the VIX index exactly. The relationship between individual futures, options, or ETPs with the VIX index can be very complicated. You can often see the VIX index rising, but its futures, options, or ETNs stagnating or even declining in value.
You can also buy the options on S&P500 to get an exposure to the VIX index, because the index actually measures implied volatility of near term S&P500 options. However, it would require a lot of calculating and rebalancing (and a big portfolio size, because you would have to buy a wide range of S&P500 options in order to replicate the VIX accurately).
For more information about trading volatility, see: Is Volatility an Asset Class?
For the specifics of trading the VIX index (which are mostly valid for the other volatility indices too), see: Trading the VIX