"Until recently, the primary way to trade market volatility was through options," says Brandon Clay. In Invest with an Edge, he looks at ETNs designed for the same purpose.
"Volatility measures historical price fluctuations, and can be in either direction. Whether a stock moved up or down by a given amount doesn't matter. The point is that it moved.
"Measuring volatility is especially important for options traders. Since options work within a limited time frame, you want to know how likely it is for the underlying security to make a big move while you're holding an option.
"An easy way to think about it: when volatility is low, it's time to buy options. When volatility is high, it's time to sell options – assuming everything else is in line. It gets more complicated, but you get the idea.
"One of the things options traders like to review is the VIX -- the ticker symbol for the Chicago Board Options Exchange Volatility Index. Popularly known as the ‘Fear Index', the VIX measures the implied volatility of the S&P 500 index options over the next 30 days.
"Practically speaking, the VIX is the expected movement in the S&P 500 index over the next 30-day period, on an annualized basis. The higher the VIX, the higher the likelihood of price fluctuations. The lower the VIX, the lower the likelihood of price fluctuations.
"While options remain the primary way for investors to trade market volatility, last January Barclays introduced two exchange traded products that track the VIX futures market: iPath S&P 500 VIX Mid-Term Futures ETN (NYSE: VXZ) and iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX).
"These ETNs help investors play the risk of the market unlike any fund before. We think now could be a great time to employ them. Both have been trending down since early April when stock prices began their ascent.
"That decline now seems to have abated. It appears that VXZ is ready to break a short-term high in the next few days, and VXX may not be far behind. Another few down-days for the S&P and we should see a spike in volatility, to the benefit of VXX and VXZ.
"This is not a long-term play. It's simply a way to take advantage of a declining market while not selling-short the market. In addition, it's a useful hedge if you want to maintain your long positions. To play potential spikes in volatility, go with VXZ or VXX." 
