John Jagerson

Predicting Volatility With the VIX, Part III

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This article is brought to you by LearningMarkets.com.

In the last two articles in this series, we talked about the CBOE Volatility Index (VIX) as one of the most effective technical indicators available to traders.

See Part I of this series on trading the VIX.
See Part II of this series on trading the VIX.

The VIX can help you to understand changes in risk, option premiums and market trends. However, the VIX is also a very interesting instrument for traders to profit from. You can essentially trade changes in the VIX through futures, options or exchange-traded notes (ETNs).

The mechanics of executing a futures, options or ETN trade are not complicated. However, although the order entry and analysis process for executing trades based on VIX instruments is relatively straightforward, there are some very unique characteristics that you need to understand BEFORE you start making trades.

In the video at the end of this article, I will show you why the VIX's tendency to "revert to the mean" creates these unique features.

Futures

There are futures contracts based on the VIX available for traders with access to a futures trading account. VIX futures are probably not a good idea for novice traders or traders with a small capital base, as each point move in the future's price is worth a $1,000 gain or loss per contract.