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!

How to Profit on Stock Market Volatility

For concrete examples, here are some VIX spikes on notable dates in history.


It appears from the information in this table that the VIX rises abruptly in response to (and possibly in anticipation of) negative events. The highest VIX spike I found was a spike to 150 during the October 1987 crash, although according to the CBOE Web site, the VIX Index hit its all-time intraday high of 89.53 on Oct. 24, 2008.

This is a discrepancy requiring further research, but it is interesting to note and appears possible. The VIX also responds positively (goes down) when an event perceived as positive occurs. The VIX went from 60.17 on Nov. 3, 2008 to 53.68 on Nov. 4, 2008, then to 47.73 on Nov. 5, 2008, after the election of President Obama.

It appears that the VIX measures both volatility and bearish or bullish market sentiment based on the CBOE definition and formula, and based on empirical evidence showing VIX movement in relation to world events.

So, then, how to you trade on stock market volatility? You cannot trade shares of the VIX because it is an index, but you can trade the VIX in the following ways:

1. Futures on the VIX: According to Reuters, trading volume in VIX futures hit an all-time high in January 2014, suggesting investors were buying protection against a market decline. The VIX futures trading volume totaled a record 4.40 million contracts, a 52% increase from a year ago and a 38% increase from December.

2.
Options on the VIX.

3.
Exchange-traded products such as the iPath S&P 500 VIX Short-Term Futures ETN (VXX) and the related (VXZ). These two exchange-traded notes are complicated because they are a cross between bonds and exchange-traded funds. Trading ETNs is tricky because the change in price of an ETN may sometimes have little to do with the underlying index but instead be related to a downgrade or upgrade in the issuing bank's credit rating. Head spin. Plus, some of the ETNs are (or used to be) leveraged products, which makes (or made) them super-risky.

Soooooo... maybe I'll go back to trading individual stocks while keeping an eye on Bollinger Bands, the VIX and other volatility indicators or maybe I'll focus more on these more complex ways to trade volatility. Whichever way you trade stock market volatility, I wish you success.

Many Happy Returns,

Rachel

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

2 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
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 16,960.57 -123.23 -0.72%
S&P 500 1,978.34 -9.64 -0.48%
NASDAQ 4,449.5640 -22.5440 -0.50%

Brokerage Partners

Rates from Bankrate.com

  • 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