How to Trade Volatility — Part 1 VXX

How to Trade Volatility — Part 1 VXX

Volatility trading is an explosive asset class that offers tremendous opportunities and growth alike. We believe the majority of retail traders are currently trading volatility incorrectly, and this new frontier is ripe with mispriced opportunities.

Connors Research has been focusing on this growing category over the last decade, while many market professionals have become interested in volatility in the last few years. Anyone involved in the markets can benefit from volatility trading strategies to diversify a portfolio, whether you’re a professional trader or just an active investor.

Click here to learn exactly how you can maximize your returns with our new 2-Period RSI Stock Strategy Guidebook. Included are dozens of high-performing, fully quantified stocks strategy variations based around the 2-period RSI.

Today, we’d like to begin by talking about the most common volatility trading instrument: S&P 500 VIX Short Term Futures ETN (VXX). The Chicago Board Options Exchange Market Volatility Index (VIX) is a progressive view of volatility in the market over a month-long period based off of the implied volatility of S&P 500 index options.

The VIX acts as an indicator of the implied short-term movement of options contracts traded on the S&P 500.Since traders can’t directly invest in VIX, the VXX ETN acts as a vehicle in a rolling long position of VIX futures contracts, and serves as an indicator of the S&P 500 Index options’ implied forward volatility. VXX offers opportunities for substantial short-term gains, and can be traded in a variety of strategies like pairing, day trading and options trading so you can have multiple positions in volatility every day.

iPath S&P 500 VIX Short-Term Futures (VXX)

Historically, when the market drops, VXX prices rise. The inverse is true as well; as the market rises VXX prices plummet. Many people (too many people) mistake VXX and VIX and try to trade them accordingly. VXX does not directly reflect the VIX, but instead is based more on daily gains and losses and the supply and demand of the shares themselves. Any kind of back-testing in VIX is irrelevant in trading VXX. VXX has the greatest growth among the volatility products currently available in the market. Recently, volume in volatility trading vehicles has skyrocketed, offering traders advantageous conditions to trade in all directions.

Over the next few days we’ll explain how volatility is auto-correlated — the correlation of a series’ values with values from an earlier period within the same series to help determine patterns — and how often the short term results occur by implementing volatility trading. We’ll also discuss the different ways to invest in the available volatility products, and hedge your investments by utilizing other vehicles in conjunction with volatility. Tomorrow we’re going to cover XIV, the inverse of VXX, and the second most popular traded volatility vehicle in the market.


Larry Connors is CEO of Connors Research

Cesar Alvarez is Director of Research of Connors Research

Joshua Glasgall is Senior Editor of Connors Research

Click here to read How to Trade Volatility — Part 2 XIV

Click here to read How to Trade Volatility — Part 3 Volatility Pairs Trading