Brokers With Volatility Index

Volatility indices like the Chicago Board Options Exchange’s VIX 75 offer traders of all stripes the opportunity to profit from fear or risk in the financial markets. This 2024 guide will provide a rundown of how to choose brokers with volatility index trading in the United Kingdom, along with useful information on how they work, how to get started, and beginner-friendly investing tips and strategies.

Volatility Index Trading

A volatility index measures the expected volatility of a market by gauging investors’ sentiment over a specific period.

• There are volatility indices on interest rates and forex, but the most popular indices measure the volatility of stock exchanges
• The CBOE’s VIX 75 is the “original” and most popular and commonly traded volatility index
• Brokers may offer financial products based on volatility indices such as CFDs
• Investors can also take a position on a volatility index through a specialised ETF or ENF
• Some brokers also offer synthetic indices, based on random number generators and not real-life market movements

The first and most popular volatility weighted index – the VIX – began its life in 1992, when the CBOE hired finance scholar Bob Whaley to develop a system based on his theoretical work to calculate stock market volatility. Whaley based the system on data from the index options market, reasoning in simple terms that a higher number of investors in options would indicate more negative sentiment among investors. In other words, more fear.

Also known as the “fear gauge” or “fear index”, the VIX 75 measures the volatility of the S&P 500. Many other exchanges also have their own volatility index – for example, the NASDAQ 100’s VOLQ, the NIFTY 50 index measuring India’s NSE, CBOE Gold (ticker symbol: GVZ), the FTSE 100 VIX (ticker symbol:VFTSE), and the VHSI measuring the Hang Seng Index in Hong Kong.

Additionally, some brokers such as Deriv.com offer their own proprietary synthetic indices today, which use random number generators to simulate the movements of organic markets. Synthetic indices should be audited and cryptographically secure, and they will work according to specified criteria – for example, some brokers offer synthetic indices with set levels of volatility between 10% and 100%.

Synthetic indices are available 24 hours a day since they rely purely on simulated and not market data. This means they will not be affected by surprise real-world events that cause sudden rises in volatility, and since they are not linked to any underlying market, they are also immune to liquidity risks.

However, many traders who believe a winning strategy can be derived from following current events and predicting human psychology prefer the – well, volatility – of the real-life market, and see synthetic indices as closer to gambling.

All in all, the VIX is both the most commonly traded volatility index worldwide and should be the easiest to find at a UK broker. As a result, there is more readily available information on the VIX than on any other volatility index, making it an excellent place to start for most investors.

How To Choose Brokers With Volatility Index Trading

The first step for investors looking to start trading volatility indices is to work out what you want to trade. This could depend on a range of factors, but in general, you should aim to trade volatility on a market you know well.

While any volatility index may be used as a source of information to inform your trades on a certain market, if you want to base a trade on the movement of a volatility index you will need access to either a financial product, such as a futures contract, a specialist exchange-traded fund (ETF) or an exchange-traded note (ETN). The options for making such trades are limited, and most of the products which are widely available in the UK are based on the VIX or synthetic indices.

The following platforms and brokers with volatility index trading are among the most popular in the UK:

Deriv

Deriv is a popular online platform available in the UK under a demo account setting which offers high-leverage CFDs on a range of synthetic indices through the MetaTrader 5 (MT5) platform.

Traders can place leveraged bets on four real-time synthetic indices using this platform, or access a wider range of options trades on an even wider variety of indices if they use the DTrader, Smartbot or SmartTrader platforms.

Note, to place live trades open an account with one of the providers below.

Pepperstone

The Australian-based Pepperstone is another of the brokerages available in the UK that offers volatility index trading, with investors able to make trades with up to 1:10 leverage on the VIX. No deposit limits also mean its easier to open an account and can get started.

As well as winning numerous awards, such as the UK Investment Trends’ client satisfaction and value for money prizes, Pepperstone supports platforms including MT4 and MT5, cTrader and TradingView, making it a top choice for traders.

IC Markets

This is one of the most popular brokers with volatility index trading. IC Markets sells CFDs on VIX futures, accessed through the MT4, MT5 and cTrader platforms. It also offers clients a range of educational material as well as a free demo account to practice what they learn.

IC Markets is regulated by the Australian Securities & Investments Commission (ASIC), the Cyprus Securities & Exchange Commission (CySEC), and the Seychelles Financial Services Authority (FSA). UK traders can get started with a £200 minimum deposit. A free pip calculator is also available.

Volatility 75 Index Trading Strategies

There is no single killer strategy for volatility index trading. The first thing to keep in mind is that the index will tend to increase when the market isn’t doing well – remember, there’s a reason they call the VIX the fear gauge, and when traders get rattled both the price of options and VIX futures will rise.

However, that doesn’t mean there will always be an inverse correlation between a volatility index and the market it is based on. It is possible, for example, for the S&P500 to steadily underperform for months, without any concurrent rise in the VIX. At the same time, if large institutions fear that the market is overheating during a period of rapid growth, both the S&P500 and the VIX could rise at the same time.

Studying historical and live charts of the VIX or other similar indices and comparing them to the assets they are based on is one way that traders can benefit from these indices. If they are familiar with the patterns that show, for example, periods when an asset or index has been overbought, they will be able to more accurately judge when a similar scenario starts to play out, and plan accordingly.

For example, a period after the VIX has reached a resistance level would indicate widespread fear in the S&P 500. This will bring to many traders’ minds the old advice from Warren Buffett to “be greedy when others are fearful”. In fact, this idea is so common that it forms the basis of a popular volatility index mantra – “when the VIX is high, time to buy.”

Above all, traders must bear in mind that the VIX measures the sentiment in the market – not its overall performance – and the implied future volatility over the next 30 days, rather than the current level of volatility.

Nevertheless, unexpected bad news that sets markets tumbling – such as the Russian military escalation and invasion of Ukraine in early 2022 – can also lead to extreme price movements in volatility indices.

It is rarely possible to predict this type of black swan event. But if you have a lot of long bets on the S&P500, this means that a long position on the VIX could be wise as a hedge against the type of unexpected news that would otherwise leave you reeling.

It is also important to note that the ETFs and ETNs based on the VIX follow their own investment criteria, and will not automatically behave in the same way as the volatility index. In addition, all indices behave differently, so the volatility index 25 will have distinct characteristics from the JSE and L&S volatility indexes, for example.

Bottom Line On Volatility Index Brokers

Brokers with volatility index trading offer investors access to unique financial products that can be lucrative in the hands of skilled traders. They can also act as useful financial indicators and tools for hedging. However, since the VIX 75 and other volatility indices behave in a specific way that mirrors market sentiment rather than performance, traders must learn the right way to read charts if they want to profit from volatility.

Use our list of the best brokers with volatility index trading to get started.

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