CVOL’s stated goal is to “produce returns that are correlated to the CBOE Volatility Index (the “VIX Index”). ” So far no one has figured out a way to offer a direct investment in the VIX Index, so volatility traders must be content with proxies.
CVOL’s competitor, Barclays’ VXX also tries to correlate with the VIX, but consistently fails, both in magnitude and its steady erosion in value due to contango. In order to avoid some of VXX’s weaknesses CVOL uses longer dated volatility futures (third and forth month instead of first and second), adds a short position in the S&P500, and uses leverage. This witches brew is spelled out with equations in Citigroup’s CVOL pricing supplement / prospectus, but I don’t know if I will ever have enough motivation / coffee to drag myself through those.
In any event, the proof is in the pudding, so below are the percentage results for CVOL compared to VXX and VIX, using its first day of trading, November 15th as the basis. Very few shares of CVOL were traded during the week so regular stock charts are mostly useless. I captured four snapshots of the market during the week, plus I took the actual trade values of some of the CVOL trades and used their timestamps to lookup the corresponding VXX and VIX values. The bid / ask spread of CVOL ranged from around .53 to 1.10 during my snapshots. I used a value halfway between the bid/asked for the chart below.
Last week was a good test case, because there was a lot of volatility in volatility. The VIX popped over +17% on Tuesday and CVOL delivered a very respectable +15% value, while VXX demonstrated its usual lethargic behavior with an 8% jump. The last two data points were on Friday, and show CVOL out performing the VIX—something I wonder if VXX has ever done. On Monday we will see if this performance was due to the typical Friday sag in VIX (due to option traders compensating for time decay during the weekend), or over-leverage in the CVOL machinery.
VXX has proved to be an abysmal long term performer , so the only believable reason for its multi-million share daily volume is traders trying to speculate on / hedge short term volatility and the associated market declines.
If tracking the VIX over the short term is your goal CVOL is a better choice.