Investors can use these ETFs to trade VIX, the “fear gauge” of the market.

Savvy investors can take advantage of market panics that stem from black swan events like the coronavirus. The fallout from the virus outbreak on oil prices, and thereafter on global equity markets, was on full display on Monday. The CBOE VIX index spiraled higher. (ETFTrends)

The CBOE Volatility Index, or VIX, also known as the “fear gauge,” was created by the Chicago Board Options Exchange (CBOE). It provides a measure of market risk, investors’ sentiments, stress and their fear. It is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. VIX is derived from the prices of S&P 500 index options. The VIX is usually stable in bullish markets but breaks higher during sell-offs and bear markets.

VIX: Black Monday

On Monday, fear was at a peak following the crash in oil and equity markets. VIX zoomed to its highest level since the 2008 global financial crisis.

The weekly chart shows how the fear gauge quadrupled over the past few weeks from a level around 15 to 54.56. It shows the growing fears from the virus and the adverse effect on stock markets. It shows how volatility has exploded from the panic selling that caused markets to stop trading on occasions during Monday as prices fell limit-down.

How investors can earn from volatility

Though its risky, investors can trade the volatility in the market by investing in ETFs that track the fear index, which in turn tracks VIX futures. One can buy these ETFs during bearish markets:

• iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEARCA: VXX)
• ProShares VIX Short-Term Futures ETF (NYSEARCA: VIXY)

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