This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Right Way to Use the VIX to Profit and Avoid Losses

Stocks in this article: VXX SPY IVV SH DOG

NEW YORK ( TheStreet) -- There are many opinions and ideas about what the VIX is and what it indicates. The Chicago Board of Options Exchange (CBOE) introduced it in 1993, according to their VIX micro site and they discuss it openly.

The VIX evolved into the benchmark for stock market volatility. It's quite popular and is frequently mentioned in publications like TheStreet.

Since volatility can indicate financial risks and uncertainty, the VIX is often referred to as the "investor fear gauge".

What many investors want to believe is that the VIX predicts the stock market's direction, but that isn't what it was created to do.

According to economist Scott Brown (in a recent discussion I had with him on this topic), the VIX is a way of measuring "implied volatility" and is mainly a tool used by option market-makers and traders.

There is an Exchange-Traded-Note (ETN) that "seeks to replicate, net of expenses, the S&P 500 VIX Short-Term Futures Total Return Index." Called the iPath S&P 500 VIX Short-Term Futures ETN (VXX), it seems designed to almost mirror the direction of the VIX.

On March 26, VXX fell to a new 52-week low of $15.57, and it has stayed above that level since. Not until May 15 did the price go above $20.

But what good is VXX if an investor doesn't understand what the VIX was designed originally to measure.

Speaking of measurements, "implied volatility" measures the degree to which option sellers are anxious about current and future market conditions. Thus, according to Brown, the VIX "is forward looking".

He explained that Robert Whaleyof Vanderbilt University, the man credited with creating the VIX for the CBOE, realized that indexing values of implied volatility on SPX (S&P 500) futures would signal a warning of an impending, potentially severe stock market correction.

Whaley's original intention evidently was to index the implied volatility of SPX puts . He apparently realized that large institutional fund managers were buying these puts when they perceived a high probability of a major market downturn.

Brown explained that put sellers will respond to increased demand by increasing the prices (premiums) they charge for these protective puts.

1 of 3

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs