Unsurprisingly, many investors want to learn more about CBOE's VIX index (VIX). Because the price of the VIX moves hand-in-hand with investors' fear of loss in portfolio value, you'll hear some folks refer to it as the "fear index." The VIX is measured by taking the mid-point between the bid and ask of the S&P 500 Index. Prices paid for options are directly proportional to demand, most notably with put options. The VIX measures volatility. As a result, historically-falling index valuation results in greater demand for the protection put options provide. Strong market moves lower tend to result in higher moves in the VIX.
I receive one recurring question over and over, "Why has the VIX moved higher and (NYSEARCA:VXX) (or others like TVIX) did not move with it?" I have answered this question many times and even wrote an article about the fear index, but we can now find the answer from someone who literally wrote the book on the subject. Russell Rhoads, CFA, is an instructor with The Options Institute at the Chicago Board Options Exchange. Russell Rhoads latest book Trading VIX Derivatives Trading and Hedging Strategies Using VIX futures, Options, and Exchange-Traded Notes, by Wiley Finance provides the reader with a full and complete answer to this question and many other volatility related products.
The VIX is a measurement and cannot be directly traded. The closest way to trade volatility is the use of futures. Russell Rhoads does an exemplary job of bringing the average option trader up to speed with volatility for indices and others like oil (NYSEARCA:USO) and gold (NYSEARCA:GLD). Rhoads begins with discussing the basics of options and the VIX and moves on to various Exchange Traded Notes (NYSEARCA:ECNS). Traded Notes are similar to Exchange Traded Funds (EFTs) like the (NYSEARCA:SPY) and (NASDAQ:QQQ), with some notable differences worth exploring.
Rhoads weaves the basics of options with a quick and informative history lesson on the VIX. Moving beyond what the VIX is and how it works, Trading VIX Derivatives describes the various products available for portfolio hedging and trading opportunities. Along with VXX which is a short term futures based trading product for equity traders, there is TVIX, (NYSEARCA:VXZ), (NYSEARCA:XXV), and others. Other products include VQT which is a hybrid blend.
Each chapter builds on the next and after fully covering the various VIX volatility products Rhoads expertly moves the reader into applying the concepts and learning into other volatility products like gold and oil. This perfect add on bonus to VIX trading and hedging gives another "kick at the can" to make sure the concepts are well understood. With the current massive lack of knowledge on volatility products by the investing public, Rhoads could not have written this book too soon. Anyone wanting to trade volatility who doesn't fully understand the mechanics of the market and various products will have to read this book. It would simply be too much of a lost edge to attempt to move forward without knowing what every other market participant knows. In an investing world where edges are small, Trading VIX Derivatives is like a life vest for investors entering peril filled waters of modern day investing.
Trading VIX Derivatives demonstrates various different methods and building blocks to build trading indicators with examples and graphs. While coming in short of giving actual ready to use indicators, the information is more than ample to begin the process of adding other variables to creating indicators. Those that use a mechanical approach to trading may find these sections especially helpful to adjust currently used signals for the ever changing environment the capital markets experience. If you want to learn more about volatility and what the fear index is, picking up a copy of Trading VIX Derivatives is the right way to find out. Rhoads easy writing style is perfect for obtaining the information you want without having to read through a bunch of filler. The chapters are well organized and while they build on each other for a start to finish review of the VIX and related products, each chapter allows for an independent "quick start" that is highly focused.
To be sure this book is not for every trader. Those without a desire to use volatility as part of their portfolio or without a concern of the overall market may find little of interest. For those wanting to take the next step in learning or portfolio modeling, Trading VIX Derivatives will be a logical step in progression. For investors considering trading the VIX in any of many products available I recommend getting a copy of Trading VIX Derivatives with the great return on investment this book offers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.