VIX-Trading. What is the best way to make money?

I am kind of confused about some fundamentals of VIX options. I understand and am able to compute the "forward" VIX underlying the options. What I dont fully understand is how this is a product to trade "pure" volatility. CBOE brags on its website how the index and also the underlying of the options (yes I do understand the index itself is not the underlying for the options) exhibit negative correlations to the SPX. Now, how do I get full exposure to volatility with such negative correlation? I mean why does both the underlying of the options and the VIX index itself move down when SPX spikes up sharply. Obviously options directly on the SPX will usually exhibit a move up in IVs with extreme moves to BOTH, the up and downside (I am generalizing here). But with a negative correlation of -0.8 or so on average this does not seem to add up at all. At least in the last few days/weeks with larger up moves the VIX clearly moved down. This supports the negative correlation argument but in my opinion contradicts the very basic concepts of probability distributions.

Anyone who can enlighten me on this?
 
Quote from artes:

The Vix is issued and calculated from the volatility of SPX Options.(about 95%)
The VX near term future reflect about 56% of this volatility.

more expl there : http://www.cboe.com/micro/vix/vixoptionsfaq.aspx
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Artes,
So, how does this relate to my questions at all? I mentioned that I am aware and know how to calculate the VIX index myself using a formula and SPX option vols. I also mentioned that I know how to calculate the "forward VIX" that underlies the Vix options. My question was about the claim my CBOE that VIX futures and options let one trade pure volatility without having to care about DIRECTIONAL movements in the underlying. This, I think, is absolutely incorrect when looking at a negative correlation of almost -0.8 between the SPX itelf and VIX futures and a very strong negative correlation between the SPX and VIX call options (and obviously a strong positive correlation between the SPX and VIX put options).

On CBOE it says this:
How do VIX options allow me to trade volatility?
The VIX formula isolates expected volatility from other factors affecting option prices, such as changes in underlying price, dividends, interest rates and time to expiration. As such, VIX options offer a way for investors to buy and sell option volatility simply and directly, without having to deal with the other risk factors that would otherwise have an impact on the value of an SPX option position.

I claim this is not true, VIX options are HIGHLY dependent on DIRECTIONAL movements of the SPX not just its own delta (weighted forward vol of SPX options).

At the moment this makes VIX options a bad investment vehicle to trade vol of vol in my opinion.

My original question was and still is: WHo can help to reconcile this obvious divergence between claims that rising vol in the SPX translates into increases in futures prices and an increase in the underlying of the options WITHOUT regard to the directional moves of the SPX and on the other side the clear empirical evidence that the SPX is correlated to about -0.8 with the futures and underlying of the options. Yes, sometimes this correlation has been lower, sometimes higher but there is a clear statistically significant negative correlation. And this means VIX options and futures ARE NOT ideal instruments to trade market volatility.

I am open to criticism of the above but please dont tell me how my correlations are wrong because I computed them myself and they are even mentioned on the CBOE website.
 
It's right that the current correlation is about -0.8, but there is no guarantee that it will stay that negative.

Last Nov it was at about -0.36
In Mar it was at about -0.95

How can you predict?

There are also long plateaus of "constant" vol whereas the SPX is in a long term up trend.
 

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Hello,

I want to hedge volatility risk of SPX options. Whats the best way to do this?

I have an ATM long straddle (SPX options) and want to hedge the risk of falling IV. Probably the best way to hedge IV will be to short VIX ATM Calls. But how do you figure out how many VIX Calls you must short to hedge the ATM SPX straddle??

Thanks and regards
 
The implied volatility of VIX options is very low. Compared to actual historical values of the VIX long Call or Puts are relative attractive.

Interestingly in times of low correlation between SPX and VIX around Nov there was a low historical vola in the VIX as well as in the implied vola of VIX options.
 

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