In this blog post, I will guide you through what options traders and investors in Europe have when trying to trade volatility (VIX Index).
The VIX is now available to Trade on eToro
European investors can now trade the VIX Index on eToro since July 2022.
The reason Etoro can do this and not other brokerages is that Etoro is a CFD broker. This makes it easy for them to create instruments that can track the movement of any underlying stock, ETF or Index in this case.
Whereas other brokerages such as Degiro only list ETFs and these need to comply with stringent EU regulations which most US funds do not comply with ( such as providing a Key Investor Information Document).
You can find the VIX Index on eToro by searching for VIX.FUT or also by following this link here. Not only can you trade the VIX on eToro but you can also add leverage to your position up to 10X.
A little bit more on what the VIX actually is
You may already be familiar with the CBOE (Chicago Board Options Exchange) VIX Index already, but for those who do not it essentially measures the expected volatility in the S&P 500 in the short term (30 days) based on S&P 500 index option prices. This has often been used by investors to gauge the level of fear or complacency in the markets and has the nickname of the “Fear Index”.
You cannot directly trade the VIX index, however many financial products such as Futures, Options, and ETFs have also been developed. These products help to replicate the VIX for investors who want to trade volatility levels seen in the market.
The VIX can be useful for investors as a hedge against black swan events that cause sudden spikes in volatility as it tends to go in the opposite direction of the market.
How to read the VIX Index
If being used purely as a barometer for how volatile the market expects the next 30 days to be then, the higher the VIX Index the more volatility (or fear) is anticipated in the short term.
An important level to take note of is 20. You will often hear news outlets commenting on whether the VIX level either rises above or drops below 20. A score of above 20 indicates the that there is a lot of fear and uncertainty in the market, whereas a score below 20 indicates that investors currently have little to worry about and may even be a bit complacent about how the market is performing.
But do not take the VIX score to mean exactly how volatile the market will be over the next 30 days, a VIX score of 20 does not mean there will be the volatility of 20%. Below is a useful formula that you can use to measure what the score is actually indicating.
At the time of writing (31 August 2022) the VIX is currently marked at 25.79. Which indicates that there is a 68% chance that the market returns will be +/- 7.45% over the next month.
EURO STOXX 50 Volatility (VSTOXX)
Where the VIX Index looks at the volatility and fear on the S&P 500, we also have an equivalent index in Europe called the EURO STOXX 50 Volatility (VSTOXX) which is calculated using similar to the VIX using options prices of the EURO STOXX 50 Index.
Unfortunately, the Europe investing market is not as well funded and mature as those across the Atlantic, so it is not as easy for retail investors to trade this European Fear Index as there are just no readily available products to do so.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.