How to Use a Volatile Market to Make Money

Stock market volatility is a measure of how paranoid investors are about the uncertainty and the prospects ahead of them. In a volatile market, you can count on one thing - wild price swings. If you are a great timer of market, then this is great news for you but if you are not the speculative type or can't stomach the risk, why not simply use the volatile condition directly to make money?. I.e. you are not gambling on a directional swing but merely on the volatility itself.

Difficulty: Easy

Instructions

Things You'll Need:

• broker account

1. Trade VIX futures. VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. The greater the fear and uncertainty, the higher the VIX value.

2. If futures market is not your cup of tea, fortunately Barclays Bank PLC has introduced iPath S&P 500 VIX shrt-term (VXX) and iPath S&P 500 VIX mid-term (VXZ) ETFs, that makes it very convenient to trade the market volatility. You can buy and sell these ETFs just like any other stocks through your broker's account.

3. If you believe the market will be more volatile in the short term, VXX is a great way to capitalize on that.

4. Similarly, if you expect that the market will be more volatile little into the future, buying VXZ now would be a great way to participate.

Tips & Warnings

• While there is good correlation between VIX and VXX/VXZ, since these are implied volatility measures, there tends to be a % point difference between VIX & VXX and VIX & VZZ.
• If you want direct correlation, you can trade VIX futures directly. It tends to be bit more volatile than the ETFs but also offers maximum potential