Trading the VIX Rollercoaster – How to profit from the current market swings

by Vince Stanzione

So far we can safely say that 2008 has been a volatile year for financial markets in fact according to a Standard & Poor’s study of daily price swings, the S&P500 index is at its most volatile in 70 years.

I thought it timely to take another look at the VIX and how we can profit by buying or selling volatility. Whilst I will focus on the VIX based on the S&P500, it is important to remember that the S&P500 still affects European markets greatly, so even if you are not trading US markets; it’s still worth watching the VIX.

What is the VIX?

The VIX was introduced in 1993 by the Chicago Board of Trade. It was a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options. Over the last decade it has been expanded to the broader based S&P 500 futures index, which allows for a more accurate gauge of future market volatility. A VIX level above 30 is generally associated with a high amount of volatility due to investor fear or uncertainty in the market. Traders buy PUT options when they are scared and think markets will fall.

VIX values below 19 usually reflect low investor fear.

Traders who wish to speculate on market volatility may want to consider taking a position in CBOE volatility index (VIX) futures, IG Index offer a spread bet on this market and it’s fairly easy to trade.

For example: April volatility is trading at 24.55/24.80. If I think volatility is going up and I buy a £1000 a point at 24.80 and a few days later the quote is 27.80/28.50 and I sell at 27.80 then I have made 3 points X £1,000. The minimum bet size is £50 a point which is a small bet; you are betting on the whole point 27.10 to 28.10 is only one point.

So far in 2008 we have had two major VIX highs one on the 22nd February 2008 where the VIX hit 37.57 and one on the 17^th March 2008 where the VIX 35.60. What did this mean? Putting it politely traders were very scared. It means the price of options became very expensive. If you look back you will find these climaxes of fear points coincide with good buying opportunities as markets tend to move higher in the next few days and volatility after blowing off comes back down again. As a point of reference the VIX hit 41 after the 11^th September 2001 World Trade Centre bombing as markets were extremely nervous, however, just a few days afterwards markets rebounding and the VIX fell.

So the way to profit is to wait for extreme fear levels such as 35+ and look to short the VIX and or buy the S&P500, then you would look to cover at around 22. I have done better selling high volatility than buying low volatility as low volatility can carry on for longer. I would mark 16 to 18 as a buying point, if we get down to this calmer reading in the next few months then think about buying volatility and look to cut back on long trades. The last low was around 16 back in October 2008. For free charts of the VIX go to www.stockcharts.com and use $VIX

Seasonal factors

Seasonally April, May and June have seen lower volatility readings the last few years, then July, August and September have seen spikes back up again, then we tend to get lower readings as we head towards the year end.

Another way to sell volatility with low risk is using fixed odds bets such as those offered at www.betonmarkets.net you can use No touch bets or Bull bets on the S&P500.

Backing your judgement

What Investment Magazine

Spread bets are not necessarily for the long term, and neither are they really investments. However, they can be used effectively within an investment strategy, for example by hedging your portfolio exposure through betting on shares or indices that are falling in value.Spread betting on sport is a high-profile activity, but reports suggest that companies offering the service now make more money from financial spread betting.

However, care needs to be taken when using spread betting. Although there are potential tax and investment advantages, you can also suffer unlimited losses.

Understanding the basics

You can bet on whether investments will rise or fall in value. The more they rise or fall, the more money you make or lose. You can bet on a wide range of investments, including shares, indices, currencies and commodities, such as gold or oil. This can provide diversification away from your existing portfolio without holding the actual investments, as you are betting on their price movement.

Say you want to bet on the FTSE 100. If it is currently trading at 6500, a company will quote you a bid (selling) and offer (buying) price. This spread may be 6490 to 6501. If you think the FTSE 100 will rise, you can buy the index at £10 a point. If the FTSE 100 does rise to 6535, you will make £340 (6535 – 6501 = 34 points).

But if the index fell to 6461 then you would lose £400. And you would lose more if the index continued to fall.

A range of options

There are different ways in which you can spread bet. Peter Murphy, director of IG Index, says you can make a daily bet that is closed at the end of that day. You can then contact the spread betting company to roll the bet over to the next day or establish an automatic roll-over until you close the bet.

Rolling over a bet incurs an overnight charge, and if you do it continually, the charges mount up and can eat into any gains. You can also set up bets for longer time periods, the maximum quoted period usually being one year.

You can close your bets at any time before they expire, as well as partially closing them – taking some of the profits the bet has accrued but retaining the bet.

Spread betting firms do not charge commission, but make money from the bid-offer spread. The prices of shares and indices are based on futures markets, which reflect the price of the underlying market plus some adjustments. These adjustments, which are called the ‘fair value’, include an interest charge minus dividends due over the period of the bet.

The spread on the quotes you are given on indices and shares will, therefore, be wider the longer the time period of the bet. Murphy says the spreads are typically around two points on daily bets, six points on quarterly bets and ten points on a yearly bet. This means you have to make a profit of at least ten points to generate a gain on a 12-month bet, but he argues that the FTSE 100 frequently moves up or down by at least 60 or 70 points in just one day.

Rules of the game

Experienced trader Vince Stanzione says there are two main factors that limit the degree of spreads, including the fact that customers can arbitrage between spread betting firms. ‘Customers can go long one provider and short another provider if they have different prices.’ He adds that ‘Firms are also competing with each other and, therefore, they will not let their spreads widen too far.’

So you should check the prices being offered and how these compare to the underlying share prices and indices. You can also take out a ‘good till cancelled’ bet, which is left open until you cancel it.

There are measures available to manage the risks in spread betting. Firms will provide demo accounts for spread betting, so you can try it out without committing any money. Once you start betting, you can use stop-losses – indeed, some firms insist on new customers operating stop-losses. These enable you to nominate the lowest point to which you are willing for an index or share price to fall or the level of losses you will accept.

Murphy points out that you can also nominate an upward price at which you want the bet to be stopped so you can take your profits.

With a traditional, automated stop-loss, if the share price or value of the index falls very quickly, there is a risk that your bet will be closed at a much lower price.

A guaranteed stop-loss, however, acts as an insurance policy. But there are wider spreads within this approach to pay for this guarantee. This means you will have to generate a higher return before making a gain. Nevertheless, guaranteed stop-loss points are very useful if you are risk averse or do not have the time to continually monitor your bet.

Vince Stanzione warns investors not to make the stop-loss point too close to the current trading price, due to normal price fluctuations: ‘You may get home and find the index has risen 200 points but you have not benefited as your stop-loss point was reached in the morning.’

In the margin

The advantages of spread betting can enhance your investment strategy. For example, you may want to diversify your investments but do not have sufficient spare capital. With spread betting, you bet ‘on margin’. This means you do not have to find all the money up front for a bet.

For example, if you want to buy 1,000 shares at £42 each, it would cost you £42,000. With spread betting, you can bet £100 a point, for example, that the price will rise or fall. Typically, you just need to put a deposit down to cover your bets. You can start spread betting with small amounts of money that may not be possible when investing in shares.

You can use spread betting to hedge existing investments. Say you think the banking stocks in your portfolio may fall in value in the short term. Rather than sell the shares and trigger a tax charge, you can bet on their prices falling and thus protect your exposure to this sector.

You could use contracts for difference (see p. 5-6) to benefit from falling share prices. But any profit from spread betting is free of capital gains tax (CGT). And you are not subject to the 0.5 per cent stamp duty that applies to buying shares.

But there is a downside. If options are used to hedge a portfolio, the cost of this hedge can be used to offset the tax on gains from the equities they were being used to hedge. The costs of using spread betting to hedge a portfolio, however, cannot be used to offset any CGT liability.

A sideways look

You can also bet on indices or share prices moving sideways within a specified trading range or on the degree of volatility to be suffered by indices. Plus it provides diversification by providing access to investments, such as currencies, that you may not normally hold in your portfolio.

Financial advisers are, however, cautious about spread betting. Patrick Connolly of Towry Law says clients have to separate it from their investment portfolios: ‘Spread betting is just gambling – it is different from investing. With spread betting, you are trying to predict daily movements in indices and shares, rather than investing money for the long term.’

Spread betting offers the opportunity to make money from rising or falling share prices. But read all the terms and conditions and ensure you understand the full risk before making a bet. After all, the losses can be unlimited.

The principles of spread betting

Experienced trader Vince Stanzione sets out ten key rules to follow if you want to make profitable use of spread betting:

1. You can make money in all market conditions
2. Start small and build up
3. Diversify
4. Know your personality and trading style
5. Money management is the key to survival
6. Cut your losses and let winners run
7. Treat financial spread trading as a business
8. Don’t get carried away by technology
9. The crowd (and the media) are normally wrong
10. Don’t feel you must trade all the time.

Vince Stanzione has produced a home study course to teach private investors how to benefit from trading financial spread bets and fixed odds, priced £347. For details, visit www.fintrader.net or call 01189 47 66 30 (24hrs).

Enjoy Sun, Sea and Spread Betting

Read the full article on Vince Stanzione in Self Made Millionaire magazine
Follow this link: Self Made Millionaire Magazine

Using Fixed Odds Bets

The last few months have seen some massive moves in markets which although profitable have put a strain on smaller traders. As well as spread betting I also use fixed odds and you will often see me listed in the 10 trades at www.betonmarkets.net If your interested in learning more about fixed odds just go to the site. Although I place bets around the £5,000 mark you can trade as little as £10 total risk.

10 tips from a spread trading veteran to help you put the odds in your favour

by Vince Stanzione

When you have been trading futures, options, stocks and commodities for over 20 years, it can be easy to forget what it was like starting out. In this article I will share with you some of my secrets that I wish I had known when I started trading.

Much of what you read about Financial Spread Betting or Financial Spread Trading, as I prefer to call it, is out of date, based on text book theories and written by those that lack true understanding of the flexibility of this financial product and do not practice what they preach.

I have traded millions of pounds of stocks and financial spread bets with most of the leading spread betting firms, mainly IG Index and Cantor Index, and I still trade actively today, so I do walk the talk. In the last few years I have also been using fixed odds options and covered warrants.

Here are my tips to help you on your way to trading success:

1. You can make money in all market conditions

While many areas of the media report the grim headlines, what they forget to tell you is that opportunities to make money as a smart trader are all around you. Today thanks to spread trading you too can profit from markets, shares, currencies and commodities to go down (Short Sell), to go up (Long Buy) and to even trade sideways (Barrier Range), where you would bet for a market to stay in a trading range say FTSE to stay within a range of 5,800 to 6,100 for the next 20 days. This can be done via a bookmaker such as www.betonmarkets.net

Remember, shares and markets fall faster than they rise so you can make much more money in a failing market than a rising one. Also the financial markets are like a seesaw, if money flows out of one market, say equity markets, then it flows into another market, such as commodities or bonds.

If the US dollar is weak, then the Euro, Swiss or Australian Dollar will be strong. Trading is a zero sum game, you always have a winner and a loser.

2. Start small and build up
No successful trader starts out in a big way. For my own spread trading I started out with £2,000 of risk capital, today I trade £50,000, £100,000+ per transaction without even blinking. Thanks to small bet sizes and practice accounts offered by some financial bookmakers such as www.capitalspreads.com you can trade via a real system with no risk. This beats the old paper trading game. Then you can start trading with small stakes and build up. One of my secrets of success is using the power of compounding profits and trades.

3. Diversify
The advantage of trading with a financial bookmaker is that it allows you to trade numerous products such as currencies, commodities, stocks and bonds all from one account, yet most customers stick to FTSE or DOW. By diversifying your bets you reduce risk especially in non-correlated markets, i.e. S&P500, Dow, FTSE, Dax are all major stock indices, you can safely say if the S&P goes down, the others follow.

However, if you traded one of the above and also Gold, Oil, Wheat or $/Swiss Franc, you would have a far better balanced account.

Another successful strategy that I trade is trading sectors. For example, you could bet one sector to go down such as Telecommunications and one sector to go up such as Tobacco.

With Financial Spread Trading you can trade over 30 major FTSE sectors both to go Long (buy) and to go Short (sell). Above we see the Tobacco sector showing excellent strength as Telecommunications slump.

4. Know your personality and trading style

While “day trading” and short-term bets may sound exciting the truth is that my wealth has not come from short terms bets. It has come from trading trends over weeks, months and years. While brokers and bookmakers like to generate more business from active customers, the winners in the long run are the least active traders. For many readers that are more conservative and with a little grey hair, you will not be suited to short term in and out trading. As a trend trader I am not glued to a screen all day and only check prices at the end of the day and on some trades only once a week.

5. Money management is the key to survival
A good trader does not need to make money that often. In fact, you could get 80% of your trades wrong and still make money. Let’s say you lose £100 on 8 trades and you then make £500 on two trades, you are in profit. However sure you are that the market will crash or XYZ is going to soar, make your first trade a small one, and then, if you are correct, add more to that trade. Pyramiding a successful trade is the key to making large returns. Never add to a losing trade!

6. Cut losses and let winners run
Everyone tells you this, but few can do it. Trading comes down to psychology and everyone wants to win and no one likes to be wrong or be classed as a loser. Most unsuccessful traders take profits quickly, yet they will let losing trades run and run as they hope things will get better. What I suggest is that you have a mechanical approach to exits and entries. That is, you have a cut out point set on opening a trade. Financial Bookmakers offer a guaranteed stop loss on most products. This means that you can place a bet knowing that the most you can lose is known, say £200, yet your profit could be unlimited. Another good tip is to trail stops, which means you lock in some profits yet keep the trade running. Once a trade moves into profit, you could move the stop loss to you entry point; this means that the worse case scenario is a break-even trade. Many class spread trading “as risky or for gamblers”. This is totally untrue as in fact with a guaranteed stop loss your risk is totally known ahead of time unlike buying shares with a stockbroker. Another point is that most new traders spend too much time planning when to get in and buy, when in fact they should spend much more time on the exit strategy and how much they are going to trade.

7. Treat Financial Spread Trading as a business
If you want to make real money, then you need to treat this as a business and work to a professional standard. Keep records of your trades, invest time and money to learn to trade, and continue to update your skills. It is a never-ending learning process. You should not be trading for fun, excitement or to impress your friends. You are in business to make money!

8. Don’t get carried away by technology
It is easy to get blown away by all the great software, on-line trading, real time data, charts, business channels and bells and whistles. The truth is, less is more, and information overload makes you a worse trader. The more complicated your system, the less chance it will work or that you will follow it. The majority of technical trading indicators are a total waste of time and you do not need to waste money on expensive trading software that claims to predict markets. The most important factor when trading any market is the price.

If the price goes to 50, 51, 55, 60, it is going up, does not matter what the indicator or news says or what you think should be happening, the price tells you the truth and should always be obeyed.

9. The crowd and media is normally wrong
Some of the best times to buy is when the crowd is terrified and there is blood on the streets. Markets go down because of lack of buyers, not because of sellers. For a bull market to continue you need new money to keep the party going. If everyone is bullish on the market, then it has no other way to go but down as everyone that wanted to buy has already done so. A classic example of this was the NASDAQ in March 2000.

In my course I reveal the sentiment indicators that I use and how to know what the crowd is doing. Be aware, stock market crashes do not start when everyone expects them.

10. Don’t feel you have to trade all the time
Only gamblers bet on markets every single day. Some time the best trades are the ones you do not make. Trading can become addictive both for losing traders who want to get even and winning traders that now are on a roll and want to take over the world in 5 days.

Markets have been here for years and they will be here for many more to come. As already stated, the best trades are trend trends where a trade is entered long or short and is left to run with the trend.

Vince Stanzione has produced a home study course to teach private investors how to benefit from trading financial Spread Bets and Fixed Odds priced at £347. For more information please visit www.fintrader.net or telephone 01189 47 66 30 (24hrs)

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