How to make money off fear and panic in the market? Volatility ETFs explained!
- Pratik Modi
- May 22, 2023
- 5 min read
Updated: Oct 17, 2025
Investors usually bet on the probability of a stock going up or going down, in order to make money. Did you know that you can also make bets on how volatile the stock market will be? This blog explains the emergence of volatality based ETFs and how those derivatives work!
Over the past few months, stock markets all over the world have faced uncertainties and imminent risk. This was triggered by volatility in response to the Covid-19 pandemic. Among all the emotions that the human mind is capable of, fear is the most primitive instinct. Cue the pandemic and investors feared losing out on their investments and so began the panic buying and selling stocks leading to volatility in the market. While this seems to be bad news for everyone, there was one particular class of people who stood to gain a lot of money off other people’s misery.
Here’s the S&P 500, an index which measures the stock prices of 500 largest companies listed on stock exchanges in the United States on Thursday, June 11:
The index fell 6% in a single day of trading. The investors lost a lot of money and it was a bumpy ride. Just not for everyone. This is the chart from the same day which shows the price of ProShares Ultra VIX Short-Term Futures ETF (Ticker “UVXY”), a type of derivative instrument that’s tied to market volatility.
It is noted that the people who had invested money in the stock market would have made losses that day. Whereas, investors who would have bought shares of UVXY stood to earn a return of almost 30% in a single day. While the S&P tumbled, UVXY gained.
Firstly, a few terms need to be explained for the sake of better understanding and grasp.
Volatility: It is a combination of how much the price of a particular stock fluctuates and how often it fluctuates. Higher the fluctuations, higher the volatility and vice versa.
Options: Mainly, there exist two types of options- Call and Put. Call options enable an investor to buy a stock for a fixed price at a future date and Put options enable an investor to sell a stock at a fixed price at a future date. For eg: If Google’s stock price is $100 and I expect it to fall in the future. So, I will buy Put options for the stock and assuming, 3 months later the stock price of Google is $70, I will still be able to sell it for $100 and make a profit of $30. To simplify, options help investors to bet on future rise or fall in stock prices with a high degree of leverage and thus, risk too.
To understand volatility trading, a good place to start is the Chicago Board Options Exchange (“CBOE”) Volatility Index or the VIX.
The VIX is also known as Wall Street’s fear gauge. It basically measures market volatility based on options prices of stocks tied to the S&P 500. The VIX tracks the price of calls and puts. When a lot of investors are expecting big swings, that demand can drive up the price of calls and puts and as a result, VIX goes up as well.
For example, on March 16, the VIX rose by 43%, a huge jump that led theVIX to a record high close. On the other hand, the markets crashed and stocks had one of the worst days in history. Investors were opting for option contracts throughout the day, driving up the prices of those options contracts because they expected more volatility in the future, and that drove the VIX up. An overlapping chart of both S&P 500 and VIX helps us to understand the inverse nature of both these indexes.
The highlighted purple portion shows the trajectory of both indexes on that particular day.
In fact, on March 16, traders were not only betting which way stocks would go, they were also betting on which way the VIX would go. That’s a type of volatility trade. There’s a whole ecosystem of trading products that allow investors to bet on how rough or calm the markets will be. UVXY is one such Exchange Traded Fund (“ETF”) which derives value from the VIX. Generally, if VIX is up, UVXY is up and vice versa. There is a direct correlation between them.
Therefore, as the panic selling started and the volatility increased, that resulted in VIX going up which ultimately resulted in stock price of UVXY going up.
Experts are of the opinion that these bets and the hedging done by traders to cover them could be affecting the market in really big ways. Volatility was just started out as a metric to measure the market. Now, we are seeing a whole host of derivatives which trade volatility itself.
There has been an increased interest in this kind of trading since the 2008 financial crisis. If we look at the assets under management for Volatility based ETFs like the XIV (a similar fund like UVXY), we can understand the type of growth these products have undergone.
The volatility business took off after the financial crisis and grew from there as bankers devised new and risky ways to trade it. More and more people are putting more money in these exchange-traded products that bet on volatility. Fierce critics of volatility trading say that volatility trading doesn’t only benefit from market turbulence, it can actually make the market swings bigger, which could make markers riskier for everyone.
If we look at the price of UVXY for the last 12 months, we notice that it has had some big gains but equally worse declines. There have also been big downward moves, leaving some investors with huge losses.
These are really risky strategies and even some of the most successful and sophisticated investors can have trouble with these trades because they can be really difficult to manage the risk associated with derivatives trading. It’s unclear how long this current bout of market turbulence will last but experts agree on something. A more volatile market is also a riskier one.
Nifty publishes India VIX which uses the same computational methodology from CBOE after making suitable adjustments. Despite that, there is no volatility based ETFs in India currently. It's only a matter of time before the markets mature and investors turn towards riskier bets in order to earn more money. Volatility based ETFs are the future of derivatives trading. The next generation of stock market pioneers may be the ones who master the art of volatility trading.
