How does the VIX work?

The CBOE Volatility Index is more commonly known as the VIX or the “fear gauge.” When investors get nervous about the market, the Volatility Index reflects that fear by measuring the market’s expectations of near-term volatility conveyed by S&P 500 options prices. The more fear that’s out there, the more churn there is in options prices. A large spike in the VIX usually indicates investors are nervous about the near-term performance of the biggest stocks in the S&P 500.

During last May’s “flash crash,” for example, the VIX spiked to 45. The VIX’s two-year average is around 25, according to Barron’s.

Full list of VIX ETFs and ETNs (ranked by volume)

iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX), average volume 19.9 million: Offers a daily long position in VIX futures contracts that are designed to reflect the implied volatility of the S&P 500 Index. The index is considered a short-term futures ETN since contracts roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract. Specifically, the focus is on volatility that is expected to occur over the next 30 days.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSE:VXZ), average volume 746,000: VXZ operates similarly to VXX, but instead of rolling futures contracts from the first month into the second month, VXZ rolls contracts from the fourth month into the seventh month. The focus isn’t so much on volatility in the current month, but rather on volatility a few months down the road. VXZ tends to be slightly less volatile than VXX.

VelocityShares Daily 2x VIX Short Term ETN (NYSE:TVIX), average volume 157,800: TVIX seeks a yield that’s twice (2X) the daily performance of the S&P 500 VIX Short-Term Futures Index. The moves in the VIX should be compounded 100 percent by TVIX. It’s leveraged fear at its best.

ProShares VIX Short-Term Futures ETF (NYSE:VIXY), average volume 45,500: VIXY is linked to the performance of the S&P 500 VIX Short-Term Futures Index.

ProShares VIX Mid-Term Futures ETF (NYSE:VIXM), average volume 6,400: VIXM is linked to the performance of the S&P 500 VIX Mid-Term Futures Index.

iPath Long Enhanced S&P 500 VIX Mid Term Futures ETN (NYSE:VZZ), average volume 6,400: VZZ is linked linked to a leveraged return (2X) on the performance of the S&P 500 VIX Mid-Term Futures Index.

VelocityShares Daily Long VIX Short Term ETN (NYSE:VIIX), average volume 2,150: VIIX is linked to the daily performance of the S&P 500 VIX Short-Term Futures Index.

VelocityShares Daily 2x VIX Medium Term ETN (NYSE:TVIZ), average volume 1,345: TVIZ is linked to twice (2x) the daily performance of the S&P 500 VIX Mid-Term Futures Index. I’d stick to an ETN with a much higher trading volume so you can move in and out of your position quickly.

VelocityShares Daily Long VIX Medium Term ETN (NYSE:VIIZ), average volume 100: VIIZ is linked to the daily performance of the S&P 500 VIX Mid-Term Futures Index. Like TVIZ, anemic trading volume makes me want to turn around and run from VIIZ – no matter how volatile the futures market is.

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