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The Volatility Index, or simply the VIX, is a measure of stock-market volatility created by the Chicago Board Options Exchange (CBOE). It measures how much volatility professional investors believe the S&P 500 index of leading US shares will experience over the next 30 days, and it has become a commonly used barometer of market sentiment.
These are the best brokers for trading VIX volatility for 2023, according to our testing and our research.
The VIX is popularly known as the “Fear Index” because sharp upward movements indicate investors are fearful of the outlook for stocks. In March 2020, for example, amid concern about the impact of the outbreak of the COVID-19 pandemic on the global economy, the VIX jumped to its highest level ever as stock markets slumped around the world.
Since the VIX has a strong negative correlation with the fortunes of the stock market, it has become a popular financial instrument among traders, who can use it to hedge against falls in stocks for diversification purposes as well as for purely speculative reasons.
The VIX is broken down into five sub-indices: the VIX 10, VIX 25, VIX 50, VIX 75 and VIX 100, where the number is based on the percentage of real market volatility. So, VIX 10 represents 10 per cent of real market volatility, while VIX 100 matches the market’s volatility in total. In other words, VIX 10 has the lowest volatility and VIX 100 has the highest. The VIX 75, which measures 75 per cent of volatility, is the sub-index most favoured by traders.
The Volatility Index is part of the indices asset class of financial instruments offered by online brokers. Indices measure the performance of stocks or another asset class, such as bonds or commodities, and are popular with traders. A stock-market index, for example, is a measure of a section of the stock market, such as the S&P 500. It is calculated from the prices of selected stocks, typically as a weighted average. Indices are used as a tool by investors to describe sentiment in the overall market, and as a benchmark with which to compare the return on specific investments.
Brokers such as IG Markets offer around 80 indices to trade on their platforms. Popular indices for trading, in addition to the VIX, include:
The VIX is created by aggregating the implied volatility on a set number of put (buy) and call (sell) options based on the S&P 500. The implied volatility of these options is used to calculate a numerical figure for the overall 30-day volatility of the S&P 500, which is in turn used as an indicator of general market sentiment.
When the VIX reading is above 30, it implies high volatility and investor concern about the direction of the market. During highly volatile periods, investors may well dump stocks to buy “haven” assets that are considered more stable in times of uncertainty, such as US Treasury bonds. They will certainly be more cautious about buying stocks, and this in itself can cause stock prices to swing more than usual. By contrast, a reading below 30 suggests investors are generally confident, even complacent, about the outlook for markets.
Ticker symbol: You can easily trade these indices on broker platforms because each has its own symbol. In the case of the VIX, the ticker symbol is very easy to remember: it is simply VIX. On the MT4 platform, the symbol for the VIX 75 sub-index is VXXB.
Volatility is a measure of the movement of an asset’s price (in this case the expected movement of the S&P 500 index over the next 30 days), rather than a measure of the price itself.
So, rather than focusing on the direction of change, you are speculating on how much the market will move and how frequently that movement will occur.
Volatility is a measure of price changes in a defined period. Rapid changes in prices in a short period of time indicate that markets are volatile. It is important to remember that volatility traders do not care about the prices or which way they move; they trade volatility itself as an instrument.
As with all indices, when you trade the VIX, through the VIX 75, you aren’t actually trading the index itself because there is no physical asset to trade. So, investing in the VIX directly is not possible, but you can use derivative products that track the price of the VIX, such as Contracts for Difference (CFDs), to speculate on future changes in the VIX or as a tool for hedging.
Profitable opportunities: Trading the VIX, via the VIX 75, can be a good way of profiting from volatile markets. It can otherwise be difficult to trade at these times because predicting where the price of individual financial instruments, such as a stock, will go cannot be done with any certainty.
Go long or short: You can bet on movements in both directions. When uncertainty is rising in the markets, it can be a good time to buy the Index, since such uncertainty is likely to result in heightened fear and hence greater volatility and the index will move higher. Equally, when investors are feeling confident, volatility is likely to decrease, opening up profitable opportunities to short the index.
Leverage: When using CFDs to trade the VIX 75, you don’t have to put up the full value of the contract but still benefit in full from any gains. If, for example, the broker provides leverage of 20 to 1, the trader only has to put up 5 per cent of the value of the contract and leverages his money 20 times over. Leverage is generally offered in the range of 3 per cent to 50 per cent of the value of the asset. The amount you are required to put up (5 per cent in this case) is known as the margin or the position margin.
Flexibility: Trading the VIX 75 with CFDs means you can close a position at any time during the trading day. That means you can hold a position for as long as you want, be it seconds, minutes or hours. You can even hold a position overnight, although there will be a charge for doing so (see below for an explanation of the costs involved in trading CFDs). Moreover, many brokers offer a variety of options when it comes to trade size, allowing a wide range of traders to access the market. This includes beginners and casual traders seeking to experiment with investment strategies while limiting their risk by focusing on small trades.
Ability to hedge: You can also use the VIX to insure against a rise or fall in other short-term bets you may have in the stock market or investments in equities that you wish to keep for the long term. Although the VIX measures volatility in the S&P 500 only, it can be a good proxy for the fortunes of global equities and other major markets because equity markets tend to move in tandem these days. There are very few occasions when volatility in US shares is not mirrored in other markets, given that the US is still the world’s largest economy and retains a huge influence over the global economy´s health and direction.
Imagine you anticipate that global equities will soon encounter turbulence and fall sharply before correcting. You could sell all the shares in your portfolio in the belief that you’ll be able to buy them back at a much lower price. But that could prove costly in terms of transaction expenses and taxes, and it is risky: global equities might rise sharply and you might not then be able to buy them back at a lower cost. Alternatively, an investor fearing a market correction could short-sell an equivalent amount of CFDs in the VIX 75, enabling them to take advantage of the short-term downtrend. At the same time, the investor continues to hold the shares within the investment portfolio, in the belief they will thrive in the long term.
Tax advantages: Unlike traditional share dealing, there is no stamp duty to pay on a CFD trade in the VIX, as you never take physical ownership of the underlying asset.
Low trading costs: The appeal of trading VIX CFDs includes low trading costs and lower margin requirements than with stock CFDs – as low as 1 per cent in some markets.
There are significant benefits to using CFDs to access the potential profits to be derived from trading the VIX 75, but there are also considerable risks that any would-be trader should be aware of before taking the plunge into trading these complex financial products.
Leverage: As we have seen, this is one of the main advantages of CFDs to traders, but ironically it also poses the main threat. Leverage exposes a trader to greater potential profits but also greater potential losses.
Moreover, if the capital in your account falls below a certain level, you may be subject to a “margin call”, where the broker asks you to put up additional funds to balance the account. If you fail to do so, it may close your positions, so crystallising your losses.
You can protect against potential losses to a certain degree. Brokers such as CMC Markets, for example, incorporate negative-balance protection into retail accounts, so your losses will be limited to the value of the funds in your account.
Constant monitoring: You need to be alert to possible changes in your position at all times. Market volatility and rapid changes in price – which could arise outside normal business hours if you are trading international markets – can cause the balance of your account to change quickly. If you do not have sufficient funds in your account to cover these situations, your positions will be automatically closed.
Market volatility and gapping: Financial markets can be very volatile and the prices of financial instruments can rise or fall precipitately at times, jumping to a much lower or higher price rather than moving gradually. This is called gapping and it can have a significant impact on traders of the VIX 75 as well as those dealing in other instruments. For example, traders may use stop-loss orders to limit their losses. This involves specifying a price at which your position closes out if an instrument’s price goes against you. When gapping occurs, however, these stop-loss orders may be executed at unfavourable prices – either higher or lower than you may have anticipated, depending on the direction of your trade.
It is easy to take on too much risk: Because the cost of trading is low, due to leverage, it is easy for investors to be lulled into a false sense of security and take on more trades than is prudent. This can leave them overexposed to the markets at any given time, such that their remaining capital would be insufficient to cover losses across the portfolio. If multiple positions go wrong, it can spell financial ruin for those who adopt a less than cautious approach to CFD trading.
Limited advantages over time: You should view CFDs as a short-term trading strategy, rather than a long-term investment option. Overnight financing charges alone can render the cost of long-term ownership of long positions prohibitive.
Counterparty risk: This relates to the risk that the counterparty to the trade, the broker in the case of CFDs, could default on the deal. Such risk is minimised by choosing a reputable broker in a well-regulated legal environment, but it still cannot be overlooked.
The simplest way is to go to a broker’s home page and tap VIX into the search function. Or you can simply check out the list above that lists those brokers that offer the VIX.
You should then compare brokers by looking at overall trading costs. These include:
Spreads: The spread is the way the broker earns money when dealing in non-share CFDs. It is simply the difference between the price at which you can buy a CFD and the price at which you can sell that same CFD at the same moment. The price at which you buy (bid price) is always higher than the price at which you sell (ask price), and the underlying market price will generally be in the middle of these two prices. Trading spreads add costs to a trade and will fluctuate along with an asset’s price and trading volume.
Financing charge: If you hold a long position, you will also be charged interest to hold that position overnight. This is referred to as a financing charge and is calculated as the current overnight interest rate charged by the major banks plus 2 to 3 per cent. If you hold a short position overnight, you will receive a payment of the current overnight interest rate minus 2 to 3 per cent.
For example, the broker IG says that for long positions it charges 2.5 per cent above the relevant interbank rate, so if the relevant interbank 1-month rate was 0.5 per cent, you would be charged 3.0 per cent. For short positions, traders receive the relevant interbank rate minus 2.5 per cent. This means that if the interbank rate is greater than 2.5 per cent, IG will credit your account. If, on the other hand, the interbank rate is less than 2.5 per cent, your account will be debited. As an example, if the relevant interbank 1-month rate was 0.5 per cent, you would be charged 2.0 per cent (annualised).
Weekend fees: You will be charged extra if you keep a position open over the weekend, as opposed to overnight.
Withdrawal fee: Some brokers may charge a fee to withdraw money. eToro, for example, says it charges US$5 for withdrawals “to cover some of the expenses involved in international money transfers”. The fee may vary depending on the type of currency involved. Some brokers may offer a set number of free withdrawals per month.
Conversion fees: Some brokers will charge a fee to convert one currency into another. eToro gives an example of around a US$10 cost to convert a deposit of £2000 into US dollars.
Inactivity fee: This is charged on the balance of an account if it goes unused for a set period. One broker, for example, charges a US$10 monthly inactivity fee on any remaining available balance if there has been no login activity for more than 12 months.
The following are some of the most popular strategies for trading the VIX 75.
Trading VIX volatility with technical indicators: You can use technical indicators such as Bollinger Bands and moving averages (MA) to determine entry and exit points for CFD trades on the VIX. Bollinger Bands are made up of an upper and lower band, set either side of a simple MA. Each band is plotted two standard deviations away from the simple MA of the market, and can highlight areas of support and resistance. Typically, when the VIX moves towards the upper level of its Bollinger Band, a low in the market has been reached and a bounce is likely. Conversely, when the VIX touches the bottom of its Bollinger Band, the market is likely to have reached a high. Moreover, when bands tighten during periods of low volatility, that tends foreshadow a sharp price move in either direction. Meanwhile, when bands separate by an unusual large amount, volatility increases and any existing trend may be ending.
The Reversal Strategy: This strategy exploits the tendency of the index to revert to the mean. It involves the use of two moving averages: a five-period MA and a 15-period MA. When the five-period MA crosses above the slower 15-period MA, that is a signal to open a buy trade, and when the opposite happens it is time to open a sell trade. Stop-losses are set just above the recent swing high for sell signals, and just below the recent swing low for buy signals.
Trading VIX 75 divergences: This simply involves trading divergences between the VIX and the underlying stock index, the S&P 500. A rising VIX usually means a falling S&P 500, and vice versa, and this strategy seeks to exploit that close and well-established relationship.
Key signals include:
To trade the divergence strategy, you simply need to add the VIX and S&P 500 charts to your trading platform and follow them.
VIX 75 trading tips
Traders can make consistent profits from trading the VIX 75, but preparation is key. Follow these tips and you will maximise your chances of trading the VIX successfully.
Use a demo account: All good brokers offer demo accounts where you can practise trading using virtual money. You can learn how the market works, how to place buy and sell orders, and how to deploy strategies, etc. at no risk to yourself. Do this for as long as you can. If you are consistently making a profit, it might be time to sign up for a real account.
Educate yourself: Good brokers offer lots of educational material on their platforms. There is also much material on the internet – including videos and examples of trades – that can help you learn all you need to know to trade successfully.
Don’t get emotional: Trading can be very stressful. Using a demo account can help you to decide whether the stress of losing money is for you or not. It is important to keep your cool when the market turns against you and know when to exit a position and accept your losses.
A large number of brokers offer the ability to trade the VIX 75. We believe that IG Markets, Pepperstone and Markets.com are among the best
Yes, you can. But as the broker FP Markets puts it, “you first need to hone your trading skills and have a lot of discipline, practice, and patience to do well in the market. Successful CFD trading is possible, you just have to do it right”. Remember: this is not a get-rich-quick scheme, and considerable risks are involved. Most successful traders aim for a consistent, modest but reliable return on their investment. A strategy that works consistently and is constantly being updated and improved is usually the best way to gain financial independence through trading the VIX 75 with CFDs.
The short answer is hard work. Spend as much time as possible researching the market and how it works. Then choose a broker and learn how to trade on its platform using a demo account. Try a variety of simple strategies and the financial instruments you wish to trade. Focus on a few strategies and a small number of positions when you start trading. Learn to keep your emotions in check and never trade larger amounts than you can afford to lose.
You can open a CFD no-deposit-bonus account without any money or a deposit account with as little as US$100. Clearly, the more money you put up, the bigger your potential profits – and losses – are likely to be. It is a good idea to start small and increase the amounts you are trading slowly as your knowledge and experience also build.
Yes, it is legal in most jurisdictions. The USA is an exception.
Yes, the profits on CFD trading are taxable, although the rules will vary from one jurisdiction to another. Since you don’t own the underlying asset when you trade CFDs, there is no stamp duty to pay in the UK, for example. However, you will be subject to capital gains tax on any profits.
CFDs are complex instruments and entail a high risk of losing money. Between 60 per cent and 80 per cent of retail investor accounts lose money when trading CFDs, according to some estimates. You should consider very carefully whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The main risks are:
Yes, you can trade the VIX 75 on MT5 as well as on MT4.
By now you should have a good understanding of how CFDs and the VIX work, the pros and cons of each, and how to proceed. But before you decide to invest, you should make sure that you can answer “yes” to all of the following check points.
CFDs are only likely to be appropriate if you:
Trading the VIX, via the VIX 75, can be a profitable and enjoyable activity as long as you have done your research and have practised with a demo account until you feel comfortable that you understand what is involved and can consistently return profits on your trades.
Trading the VIX allows you to keep generating profits when markets may be too volatile to trade other products with any certainty. Indeed, volatility trading is particularly valuable when markets are spiking or moving erratically. If you’re expecting volatility but are uncertain which way the market will move, volatility trading enables you to take a position and to reap profits if that volatility materialises.
Trading the VIX 75 is relatively straightforward and there are a number of strategies you can use, so it is a good area for intermediate traders to try.
