Never Bet on Volatility through the Vix ETF

Never Bet on Volatility through the Vix ETF
Never Bet on Volatility through the Vix ETF

The Vix ETF is an exchange-traded fund that tracks the volatility index, or “the fear gauge.” In this article, we talk about whether it’s worth your time to buy into a volatile market.

The “leveraged vix etf” is an ETF that has been designed to allow investors to bet on volatility. The fund, however, is not a good investment because the market will become more volatile in the future.


I’m furious. I’m enraged, to say the least. I purchased an investment in September and sold it this week for a 25% loss. I’m not angry anymore since I lost money on the investment. People lose money all the time when they invest; it’s a part of the game. I’m enraged because the investment I believed I acquired turned out to be a dud.

In September of this year, I forecasted that the VIX, or volatility index, would trade at a discount. Because the VIX is a mathematical equation rather than a stock, I knew I couldn’t purchase it directly. As a result, I purchased an ETF (an exchange-traded fund that holds a basket of securities). This ETF is designed to “clone” the VIX’s performance, and a correlation investigation revealed that the ETF has a correlation coefficient of.93 (93 percent ). “Wow!” I said. I sat back and relaxed after placing the order. I knew there wasn’t a perfect link, but how far off can 7% really be?

The 7 Percentage Power

The correlation coefficient is a statistical measure of how strong a link exists between two variables’ relative movements. A correlation coefficient, for example, might be used to determine the degree of connection between the price of crude oil and the price of an oil company’s shares. A correlation of 1.0 would be if every time a barrel of oil increased by $1, the oil-producing firm increased by $3. There is a perfect match. When one goes up, the other follows suit. Investing in an oil firm would seem to be a wonderful choice if you were long oil.

Consider the following situation. Consider this: if a barrel of oil increased by $1, the oil-producing firm increased by $3, but if a barrel of oil decreased by $1, the oil-producing company decreased by $6. This is still a perfect correlation since as one variable increases, the other increases as well, and vice versa. If you were long oil, though, you’d be better off purchasing an oil futures contract, since if you owned the firm, oil would have to move up $2 for every $1 it lost to break even.

Why You Shouldn’t Invest in a Vix ETF If You Want to Bet on Volatility

The VIX closed at $14.67 on September 16th, 2019. The VIXY, an exchange-traded fund that is designed to mimic the VIX’s performance, ended the day at $19.25. The VIX closed at $27.85 on February 25th, 2020. The VIXY ended the day at $15.54. The VIX increased by 90%, while the VIXY decreased by 20%. Isn’t it a crazy connection?

So, how did this come to be? To comprehend this, we must first comprehend what the VIXY does to monitor the VIX. The VIX isn’t a stock, so keep that in mind. It is a mathematical formula. While the equation may seem frightening, it simply indicates the market’s forecast of 30-day forward-looking volatility. As a result, the index rises as projected volatility rises.

Volatility can only be wagered in two ways. One option is to acquire a futures contract, which is a contract that requires you to buy or sell an asset at a fixed price at a future date. You may also purchase an exchange-traded fund (ETF), which buys and sells groups of futures contracts and puts them in a basket that you can invest in. While both represent a high level of risk, the latter poses a greater threat to long-term investors.

The VIXY ETF operates by purchasing more costly, longer-dated futures and selling less expensive, shorter-dated contracts. This cycle essentially causes investors to purchase high and sell low, which is the polar opposite of what they desire to accomplish.

Almost all of the time, the VIX is in a condition of Contango (see image for visual). Futures contracts that are farther out in time are more costly than the present price, which is known as contango. This makes sense since predicting what will happen next month is considerably simpler than predicting what will happen a year from now. While in Contango, however, the futures price will fall to the current price after the contract expires.

So, how are you going to win?

Buying a futures contract is the most direct approach to invest in volatility. To be honest, I’ve never bought a futures contract. However, buying a futures contract ensures that you’ll be able to replicate the VIX’s performance without having to worry about the downside risk of an ETF.

You can utilize a VIX ETF if you don’t want to get caught up in employing leverage and risking a large stake. You must, however, ensure that you are just planning on staying for a limited time. I use the phrase “short term” to refer to a holding duration of no more than 30 days. This may be challenging since predicting anything in finance within 30 days is a wonderful achievement, and if you could do it on a regular basis, you’d be a multimillionaire.

Important Points to Remember

Consider purchasing APLE, the ticker symbol for Apple Hospitality, a real estate holding company, instead of AAPL, the ticker symbol for Apple Inc. You’d be angry, particularly if AAPL increased by 100% and APLE decreased by 25%.

The good news is that you may still rejoice. Your theory was right, even if you gambled on the incorrect security. In terms of the VIX, I was correct. I just chose the incorrect vehicle to invest in. “You either become wealthy or you get wiser,” as the old adage goes. “Never the two.”

The “inverse vix etf” is a new ETF that will invest in companies with the opposite of volatility, or inverse volatility. It is meant to be a safer investment than traditional investments like stocks and bonds. Investors should not bet on this fund because it has been very volatile in the past.

Frequently Asked Questions

How do I bet on VIX volatility?

A: There are a few ways to bet on the VIX volatility, which is short for Volatility Index. The way that I recommend is through an options contract in OTC markets like those offered by CBOE or CME Group. You can also try buying put and call options from any broker who offers them

Should I buy a VIX ETF?

A: VIX is a volatility index. You should buy it if you think its going to drop and potentially make you some money in the future, or if you are looking for income from your investment.

How long can you hold a VIX ETF?

A: The VIX ETF can be held for as long as you want.

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