For the average investor there are two, not so attractive, ways to go long on VIX:
- Buy VXX Exchange Traded Notes
- Buy VIX options
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The first one, buying VXX, is the simplest—anyone with a brokerage account can do this one. Be aware that the VXX will definitely lag the VIX index (think molasses), and it is not suitable as a long term holding because the people in the VXX shop are forced to continually shift from short term to longer term futures contracts, usually at unfavorable rates. The VXX closing value its first day of trading, 30-Jan-09, was 104.58, the VIX index closed at 44.95. In December 2009 VXX had dropped to 38, a 63% decline, compared to the 50% drop in the VIX index value to 22. This is a pretty substantial tracking error.
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The second one, buying VIX options, is no more difficult than buying equity options. Unfortunately they too lag the VIX index because they are also tied to VIX futures, not the VIX index. In addition to their sluggish performance, they have these other issues:
- The bid / ask spreads are huge! Never pay what is offered, use limit orders and split the bid/ask prices (e.g., if the spread is 3.40/3.80 and you want to buy, offer 3.60 or 3.70 with a limit order.) More on trading VIX options here.
- The VIX options are European exercise, unlike most equity options—practically this means the VIX options will predictably match (approximately) the VIX index, only once a month—the moment they expire.
- The posted greeks (delta, gamma, etc.,) are almost always wrong. See more here.
- Like all options, their premium value erodes with time, especially as you approach expiration.
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If you want to go long on the VIX index you are probably hoping to speculate on its big swings, or you are trying to hedge your portfolio against big, sharp declines. If you want to speculate, be prepared to move in a hurry—the VIX drops quickly once the market angst subsides. Most of the action is over in a few days. If you want to hedge, frankly I’d look elsewhere (e.g., long term out of the money puts), because these two choices are expensive if you are trying to get enough leverage to really protect a long portfolio.
View Comments
Comment by Charlie Lefaux — January 3, 2010 @ 9:45 am
I would say the best option if you want to go long S&P volatility is a near-term delta-neutral straddle as opposed to VXX tracking errors and/or going long VIX futures options.
Comment by Bill Luby — January 3, 2010 @ 11:41 am
I'm delighted to see someone else who is interested in the VIX and volatility — and has some excellent content on the subject.
I am with Charlie in that the best way for a retail investor to assemble a pure play on S&P volatility is with a straddle on the SPX or SPY. Here an investor also has the benefit of a favorable bid/ask spread and liquidity. The next best choice is probably VIX futures, from which, as you point out VXX and VIX options (for all practical purposes) are derived.
As an aside, you may want to check your data source on VXX to make sure you have data going back to the 1/30/09 launch.
Cheers and welcome to the blogosphere,
-Bill
Comment by paul — January 3, 2010 @ 1:35 pm
what does the stock price differential between VXX and VXZ tell you about the term structure of vol? Early 2009 both ETNs were priced above 100 and now a big difference. Has vol curve really steepened that much? Would you view those as good vehicles for playing a flattening, or steepening, of vol curve?
thanks
Comment by vance3h — January 3, 2010 @ 8:39 pm
Hi Bill,
Thanks for the correction on the beginnings of the VXX/VXZ ETNs. I have corrected the post to reflect the January 2009 launch.
– Vance
Comment by vance3h — January 3, 2010 @ 9:13 pm
Hi Paul,
The vol curve is not something that I follow directly. Bill at http://vixandmore.blogspot.com/ is a better resource.
As a longer term investment VXX has shown that it doesn't track the VIX index short term volatility metric particularly well. Their methodology requires them to roll over from current month to next month volatility futures on a daily basis–which hurts them if the next month futures are valued higher than the present month (“in contango” in futures terminology)–which seems to the be the typical case. VXZ is not very popular (only $30M in assets compared to $704M for VXX), so I suspect the bid/ask spreads are wide.
Comment by Bill Luby — January 3, 2010 @ 10:20 pm
Hi Vance,
I didn't realized this was your new blog. Anyway I like the new look and feel and have replaced the old blog with the new one on my blogroll.
Hoping seven or eight figure investing is just around the corner,
-Bill
Comment by vance3h — January 4, 2010 @ 11:17 am
Hi Bill,
Thanks for the feedback. I’m hoping to learn more about SEO, and my son, who is a web designer informed me that WordPress was the way to go. It was a significant learning curve, I hope it’s worth it. Thanks for the bogroll mention, I really appreciate it.
– Vance
Comment by sam — July 9, 2010 @ 3:56 pm
Is trading the Vix like trading a stock or does it expire like an option
Comment by sam — July 9, 2010 @ 9:56 pm
Is trading the Vix like trading a stock or does it expire like an option
Comment by vance3h — July 10, 2010 @ 8:12 am
Hi Sam, I assume your question relates to the VXX, because you can’t directly trade the VIX itself. The VXX doesn’t expire, so in that sense it is like a stock. However the VXX will never behave like a good growth stock with the prospect of growth every year. Instead it is fated to bounce between two levels, one established by elevated volatility, and the other established by the moderate movements of a quiet market. In fact, its long haul prospects are even worse than that–because its sponsors must continually roll over the futures contracts it’s based on there is a structural erosion factor built into the VXX. Over the long run (multiple months) the VXX will always go down. For that reason I don’t consider the VXX a buy-and-hold candidate. You should only buy it when you think the market it going to fall sometime in the near future.
Comment by Anonymous — August 27, 2010 @ 3:50 am
You can’t trade the VIX directly. You can trade VIX options, which are based on VIX futures, or VXX / VXZ and their options–which are based on a two month rolling mix of VIX futures. See my “popular posts” section on the right side of my blog for more info.
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