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I've been following the VIX (aka Fear Index) for awhile now. I superimposed a 5 year graph of the VIX over the stock market index and noticed an interesting correlation. Generally speaking, if one goes up, the other goes down.

Since the range of the volatility index is confined from 1 to 100%, it's a little easier to predict where it's going next, unlike the the stock market which has no defined ceiling. Furthermore the VIX usually hangs out around the 10 to 30% range, and hardly ever stays above 40 for any long periods of time, which makes it even easier to predict. Timing the stock market directly is difficult, but maybe timing the VIX is not as hard.

I've made some speculative trades where I bought stocks when the VIX rose past 40, and sold my holdings as soon as it dropped back below 30. I've only tried this with 2 stocks in the past but have profited from both trades. Of course this is all speculation and not a sound investment strategy. Just wanted to share my findings and ask if anyone else uses the VIX as a tool/indicator for making trading decisions and would like to share. :cool: Knowledge is power.

Cheers,

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My Road to Freedom
 

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Works well in theory for the violent bear market that we have had. Problem is, whenever a secular bull market comes back you will have sold and be waiting in vain for a chance to buy again. I suspect one wouldn't commit all their capital to the strategy though.
 

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I've been posting some of my entry/exits for VIX in the market forecasts thread, it's not an investment vehicle but if you learn how to read the chart, it's a great short-term trading tool in a bear market...

The price is a function of the daily moves in the S&P500, so a -3% daily move in the S&P will take us back to VIX 40. VIX 40 implies +/- 5% daily change is possible (~60 SPX points/~600 DOW points). VIX 60 implies +/- 8% daily change is possible (~120 SPX points/~1200 DOW points).

If you want to play the VIX directly there are a few options available and it can be much more profitable than individual stocks. Just consider how much principal you'll put in the trade (I always use 5% or less of my account), if you're wrong you can get trapped and it can be your biggest mistake ever.

Bull
TVIX
HUV.TO
HVU.TO
VXX.TO

Bear
XIV
 

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The price is a function of the daily moves in the S&P500, so a +3% daily move will take us back to 40. VIX 40 implies +/- 5% daily change is possible (~60 SPX points/~600 DOW points). VIX 60 implies +/- 8% daily change is possible (~120 SPX points/~1200 DOW points).
i didn't really understood example above... could you please explain in simple English?

Bull
TVIX
HUV.TO
HVU.TO
VXX.TO

Bear
XIV
I think it should be opposite XIV is a Bull equity, as it usually goes up when SPY is up and vice verca
 

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I don't know too much about buying and selling the VXX or XIV

But, couldn't someone just buy XIV right now and wait until the next bull market and make some coin?
 

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I meant bull/bear for VIX

The VIX is just reflecting the present size of a move in the S&P500 and the potential range for future moves in the S&P500 over the next 30 days. The problem is it's rarely very good at forecasting long term timeframes like 30 days, if I'm in the VIX most of the time I'll take my gains the same day or the next day at most.

Someone made a nice scatter plot about the implied percentage changes in the S&P vs VIX based on the last 25 years of data, but I can't find it in Google Image Search :(

I found this one for now...

The traditional "rule" is that for every 1% change in the SPX the VIX moves approximately 4% in the opposite direction, but in a bear market and times of many outlier events there are anomalies



As you can see, if you take a step back, any major upside in the VIX is extremely rare and short lasting
 

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I don't know too much about buying and selling the VXX or XIV

But, couldn't someone just buy XIV right now and wait until the next bull market and make some coin?
In theory - yes, as VIX (as per historical chart) sooner or later will go below 20, and XIV should go up..., but would it work in real life :confused:
 

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The VIX index is based on activity in VIX futures markets, so I think to go long you have to choose an ETN (no tracking error) over an ETF (tracking error b/c of exposure to contago & backwardation periods)

Apparently ETNs don't have tracking error but carry issuer credit risk where the entity backing them could blow up



I don't know anyone using VIX as an investment vehicle and I'm not very sure about long term implications.... Maybe someone else could fill in on that detail.

I found out there's only 3 actively traded volatility indices in the world:
VIX (US)
VSTOXX (Europe)
RTSVX (Russia) (USD-denominated)
 

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s&p falling -> vix rising (inverse vix falling)
s&p rising -> vix falling (inverse vix rising)

I enter when I see the market has changed direction and exit quickly because at any moment price could snap back the other way, I anticipate moves but I don't try to predict the future, I just wait for an ideal trend to form
 

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To tell the truth , I don't really understna VIX/XIV behaviour.
Below are prices of VIX/XIV during different days last 3 months (when VIX was around 30).
XIV should be inversed VIX, but if 3 months ago VIX was 31.66 and XIV was 12.45, now VIX even lower and XIV lost 50% to 6.21

VIX XIV
31.66 12.45
31.87 10.10
31.58 9.66
31.62 7.88
30.98 7.24
30.70 6.64
31.32 6.27
29.86 6.21
 

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VIX is lower than 3 months ago?



XIV is supposed to be an inverse tracker but there are some anomalies, look at March 2011 (.jp earthquake), the VIX spot price spiked like crazy but the XIV (based on futures contracts) only pulled back a little. I think this has to do with the contango/backwardation effect and the way futures market works
 

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There was an extended period of very high volatility in the VIX (unprecedented) over the last few months. Volatility in the underlying is the enemy of any daily reset ETF. Given the change in the front month vix futures over the last three months, XIV should be at 9 or so dollars rather than the 7 it is at presently. That $2 difference/tracking error is a result of compounding and substantial backwardation in the VIX futures term structure.

Don't speculate in VIX ETFs/ETNs unless you really understand how they work.
 

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Make a VIX play in 2012?

With some moderate to extreme market volatility looming in 2012, is there anyone looking to make a VIX play (TSE:HUV) in the next 1-2 months?
 

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Discussion Starter #15 (Edited)
volatile times indeed

I think those who have money are starting to increase their appetite for riskier investments again. The recent holiday shopping season was really busy in North America with record sales. No doubt there is a lot of money out there in the hands of both consumers and corporations. At some point investors have to say wow, from a risk adjusted point of view government and corporate bonds just aren't attractive anymore compared to equities. I think 2012 may be the year we see the start of the stock market come back. But still with lots of volatility along the way of course.
 
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