How to Day Trade Volatility ETFs: A Beginner's Guide

Nov 26, 2023 By Triston Martin

Prices constantly fluctuate in the world of finance. This is good that you can't earn money trading even if prices do not change. There are times when prices move faster than they do at other periods. The speed or the intensity of price changes (in any direction) is known as volatility. When volatility rises, the chance of making more money in a short time also grows, so you should know How to Day Trade Volatility ETFs. But increased volatility comes with a higher risk. When volatility increases in a particular direction, you may be able to earn above-average profits; however, you run the possibility of losing a more significant amount of capital over a concise amount of time. If you're disciplined enough, you could profit from volatility while minimizing the risk.

ETFs compare to. ETNs

While all are often called ETFs with volatility, specific instruments are ETFs, while others exchange notes (ETNs). ETNs are a type of fund that trades on stock exchanges and holds an underlying portfolio of assets. An ETN is an exchange-traded note which trades on exchanges. However, it is classified as debt security and contains no assets.

ETNs aren't prone to the same tracking issues which ETFs could be susceptible to because ETNs track an index. ETFs, in contrast, are invested in assets (usually those held in the benchmark index), and the value of these assets may differ from the index. If divergences occur, they can cause performances that are not in line with the results of an ETF and the benchmark index it's meant to represent. But, ETFs and ETNs are equally suitable for day trading high volatility, provided that you can prove that the ETF or ETN trading can handle a large amount of liquidity. Liquidity is determined by the volume of trade or the number of shares traded daily.

The Choice of The Volatility ETF/ETN

There's a wide selection of exchange-traded funds for volatility that you can select from, and inverse volatility ETFs are among them. Inverse volatility ETFs typically move in the direction of major stock market indexes (the opposite or inverse direction of traditional ETFs for volatility). For day trading, it is essential to choose an ETF/ETN with significant volume is generally the most suitable option. It is the iPath S&P 500 VIX Futures Short-Term ETN (VXX) that can be described as the biggest and the most liquid in the world of ETFs and ETNs that are volatile.

The Best Times to Day ETF/ETNs For Trade Volatility

VXX typically sees explosive movements if the S&P 500 falls. The changes in VXX usually far surpass what is seen in S&P 500. For instance, the drop of 5% within the S&P 500 could yield an increase of 15% for VXX. So, trading VXX offers more potential for profit than just selling an investment like the SPDR S&P 500 ETF (SPY). Because VXX tends to "overshoot" with declines within its benchmark index called the Standard and Poor's (S&P) 500 Index, when the S&P 500 rallies again, VXX typically goes through a sale dramatically. The day traders can profit from two avenues to make money:

  • Buy VXX if your S&P 500 is falling.
  • Short VXX after a price increase after you see the S&P 500 begins to rally upwards, and VXX is declining.

Based on the magnitude of the change in trend within the S&P 500, the favorable trade conditions at VXX may last for several days or even months. The graph below illustrates the short-term decrease and reversal in S&P 500 and the corresponding rise and decline in VXX.

Think About Taking A Few Profits

In volatile markets, gains could suddenly disappear and then turn into losses, so you should think about strategies to secure more significant gains. One strategy is to lower your profit goals for a portion of your portfolio. If your stock price is accelerating upwards, you might consider selling a small portion of your holding, but you let the rest ride to take advantage of any gains that may come.

If you're more worried about protecting your earnings as opposed to being shut out, think about the use of a trailing stop, a type of stop-order in which your stop price is in line with the price of the stock when it is higher but you make sure you set a more restrictive stopping price for trailing stops. Remember that the trailing stop's price adjusts itself and is below the market's price by the number of points or percent you choose if the stock is rising. It can reach if the stock starts to decline and the stop price is frozen at the level. When the market is activated, it is converted into a stop order.


ETNs and Volatility ETFs typically have higher price fluctuations than the S&P 500, making them perfect for trading on the day. The best chances (in terms of the percentage price changes) are during and immediately after the times when the S&P 500 has significant declines. An ETN that is volatile like that of the iPath S&P 500 VIX Short-Term Futures ETN could predict the direction of what is to come from the S&P 500 is going to follow next.

However, stopping all trades if the market is swaying against you is an excellent option to minimize the risk. Profits must be higher than losses. So even if 50% of trades are profitable (profit goal is met), The strategy will still be profitable. Do not invest in this strategy if you cannot reasonably expect to make at least two times your risk based on that day's volatility.

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