Trading the Direction of Implied Volatility
The most straightforward application of VIX futures and options is to trade implied volatility. While implied volatility can also be traded with straddles or by unwinding delta-hedged option positions, VIX contracts offer a cleaner and less costly exposure which does not need to be adjusted when the market moves. Another attractive feature is that VIX is relatively simple to track and that it can be forecast from several readily observable variables: the current deviation of VIX from its mean, past realized volatility, the performance of the S&P 500, and even the month of the year.

Implied Volatility Spreads
An alternative to an outright position in implied volatility is the exposure to changes in implied volatility obtained by spreading between successive VIX futures contracts. For example, a spread short March VIX futures and long April VIX futures will earn a positive return if the expected difference between May and April volatilities widens. The average realized spreads in the table below can serve as broad reference points for expected spreads conditional on different initial values of VIX.

Average Realized VIX Spreads 1990-2003

Spot VIX	Spot to 1 Month	1 to 2 months	2 to 3 months
15 to 20	4.02	1.64	1.74
20 to 25	0.92	0.85	0.25
25 to 30	-0.96	-1.24	-0.48
30 to 35	-3.23	-2.88	-1.57
35 to 40	-4.63	-2.94	-2.77
40 to 45	-9.95	-4.11	-2.33

Hedging Market Risk and Portfolio Diversification
The tendency of VIX to increase when the S&P 500 decreases implies that money managers can buy VIX futures to hedge equity portfolios. VIX futures are also useful for portfolio completion and diversification because the mean return and volatility of VIX are significantly higher than those of core assets (equities, bonds, commodities and real estate) and because it is weakly correlated to non-equity assets. Adding VIX to a portfolio expands investors' risk-return opportunity set even when the portfolio appears already broadly diversified.

Hedging Implied Volatility Risk
Because VIX futures settle to the implied volatility of the S&P 500, they are natural to hedge the "vega" risk of S&P 500 options. VIX futures are also effective to cross-hedge the vega risk of stock options and stock indexes correlated to the S&P 500, whether these are exchange-traded or embedded in other assets.

Hedging or Spreading against Realized Volatility Risk
The high correlation between implied and realized volatility also makes VIX futures effective for hedging and spreading against investments or strategies exposed to realized volatility risk, e.g. volatility swaps, stock index arbitrage strategies, and indexed portfolios whose rebalancing costs and tracking error costs mount when volatility increases.