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Profitable Trading in Volatility Index Option

Trading in VIX is profitable. But, traders need be aware of the market extremes and exercise the right of Calls and Puts options properly. Read this article to gather more information.

VIX, which is the acronym of Volatility Index Option, made its debut in 1993 at Chicago Board of Exchange. It is one of the versatile (and volatile) trading options that can be leveraged to yield a huge profit. It is also referred as 'investor fear gauge'. It is a ticker symbol at CBOE, which is considered as a measure of the expected future market volatility for the forthcoming 30 days. In short, it is a measure of the probable market risk, which uses the implied volatility of varied S&P index options. VIX comes with Calls and Puts.

Since volatility index is a kind of expecting the future condition of the stock marketplace, it leaves us to many uncertainties - traders are not sure whether future days will predict a bearish or a bullish trend. When VIX is on a rising curve the investors are in a mood of fear - it is a bearish market indication. When the reverse happens, that is when VIX dips low, the sentiment of the market is complacent indicating a bullish stock market environment. Volatility index is a powerful contrary indicator, which can warn investors of times when stock market hits extreme conditions (either a high rise or a sharp dip in stock prices).

These options are in the format of European style contract, which means that options can be traded on the expiration date only. Hence, there is no possibility of arbitrage - where you have to make immediate action in buying, exercising an option, and selling off the underlying security for a profit.

The Basic Difference Between VIX Trading and Standardized Option Trading

Standardized options expire on the third Friday in a specific month, whereas the one based on volatility expires on every Wednesday of a particular month. The former one belongs to the American style, meaning it can be exercised any time before or on the expiry date.

Even though volatility index options are versatile, yet due to its volatile nature it becomes really hard to trade with such a financial derivative. Profit making is also difficult. If you have the right knowledge and experience to turn an index to your favor, you can ensure monetary gains out of this trade. The premium of VIX is lower than that of stocks.

If you are not sure how to trade with volatility index option, you can seek professional guidance of a trading consultant. He will be able to provide perfect strategies to leverage this financial derivative to the optimum level of profit.

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