Most people know that stock market traders can make big profits when the value of stocks rise, but did you know that it is equally possible to profit from falling stock prices through options trading? This is because options trading involves contracts that enable options traders to choose to buy or sell at previously agreed upon prices regardless of the market price.
When options traders anticipate ups and downs in the stock market, this activity is visible on the CBOE Volatility Index (VIX). The VIX is a handy barometer of market conditions and an informative tool for trading options, futures, and stocks. In this article, we will look into what trading the CBOE Volatility Index means and how to trade it in Nigeria.
What Does Trading the Volatility Index Involve?
Trading the Volatility Index refers to the activity of betting on or hedging against market volatility by employing financial instruments connected to the VIX. The VIX estimates the predicted 30-day volatility of the S&P 500 index (SPX) based on the values of its options. A VIX below 15 signifies little volatility and a placid market. A VIX between 15 and 25 shows normal volatility. Also, a VIX exceeding 25 signifies excessive volatility and increased risk.
There are various techniques used for trading the Volatility Index. These include VIX futures, VIX options, VIX ETFs and ETNs, and volatility-based strategies. Trading the Volatility Index poses several risks, which involve time decay, unexpected spikes, and ETF decay. VIX trading can be ideal for day traders and speculators, hedge funds and institutional investors, and options traders.
How to Trade the VIX in Nigeria
Here are some actionable ideas for trading the Volatility Index in Nigeria.
Use international brokers for trading the Volatility Index
The CBOE VIX is not currently available on the Nigerian Stock Exchange (NGX). For this reason, traders in Nigeria must rely on international brokers like
Weltrade to provide access to VIX-related securities including futures, options, ETFs, and CFDs. Leveraging an international broker involves a sequence of steps. The steps are finding a trusted international broker, opening an account with the chosen international broker, trading the Volatility Index through the broker, and managing risks when trading the Volatility Index. Importantly, it is crucial for traders in Nigeria to choose a broker based on their trading needs—whether futures, options, ETFs, or CFDs—and manage risks properly.
Trade VIX futures
VIX futures enable traders to speculate on or hedge against predicted volatility in the S&P 500 over a given time. The major characteristics of VIX futures are future volatility estimate tracking, monthly contract expiration, a highly liquid market, and applications in hedging or speculation. To trade VIX futures, traders need to choose a broker with VIX futures access, understand its pricing, select a trading strategy, and watch expiration dates and roll contracts. It should be mentioned that trading VIX futures comes with major risks. To start, leverage can exacerbate losses, and contango can limit earnings. Then there is the general unpredictability of volatility.
Trade VIX options
VIX options are financial derivatives that allow traders to bet on or hedge against variations in market volatility. Some key aspects of VIX options include European-style options, cash settlement, and monthly expiration. Trading VIX options involves a set of actions. These are choosing a broker that offers VIX options, learning VIX options contract characteristics, implementing a trading strategy, and monitoring expirations and risks. The hazards of trading VIX options should be evaluated. For instance, time decay can erode value, and profiting from the options requires perfect timing. Additional ways of trading Volatility Index options are VIX ETFs with options, S&P 500 options, and VIX CFDs.
Concluding Analysis
We have explored what trading the Volatility Index means and how to trade it in Nigeria. Every investor should remember not to invest more than they can afford to lose. A cautious investment strategy will pay off in the long run.
