VXX prospectus

Monday, February 13th, 2012 | Vance Harwood
 

You can find Barclays’ VXX prospectus here.  The prospectus covers both the short term VXX, and the medium term VXZ.

This post discusses going long on VXX.

This post discusses some choices if you think VXX is going to go down.

For a full list of volatility ETN/ETFs see Volatility Tickers.

The chart below shows the performance of a hypothetical $1000 investment in VXX vs VIX since its inception in early 2009—it’s not a pretty sight. The VXX investment would be worth $66 today… VXX should not be a buy-and-hold investment.

 

Click to enlarge

 



Going short on VIX?

Thursday, October 9th, 2014 | Vance Harwood
 
Unlike the S&P 500 or Dow Jones Index there is no way to directly invest in the VIX index.  I’m sure some really smart people have tried to figure out how to go long or short on this computed volatility index, but currently there’s just no way to do it directly.  Instead, you have to invest in a security that attempts to track VIX.  None of them do a great job of this.   I’ve given a short answer and a long answer below on how to best short the VIX given the current choices.  Take your pick.
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Short Answer
  • Buy VelocityShares’ ZIV inverse medium-term volatility.   This product follows general volatility trends, but doesn’t have the neck snapping moves of the short-term based products.   You definitely still want to exit if the market volatility starts climbing, but you have more time to react.   In the post Timing Inverse Volatlility with a Simple Ratio I provide a straightforward method to time your ZIV entries / exits.
  • If you want to aggressively short on VIX buy VelocityShares XIV or ProShares SVXY
    • XIV & SVXY attempt to match the opposite percentage moves of VXX.  Since VXX only manages about 50% of the VIX’s percentage moves you should expect XIV to have a similar behavior.  For more on XIV see this post.

Long Answer

The  current set of securities that attempt to track or provide the inverse of the VIX index include:

  • Volatility futures contracts  (CBOE VIX Futures)
  • Options on volatility contracts (CBOE’s VIX options)
  • VXX & VXZ ETNs with theirVelocityShares, ProShares, and UBS investment bank competitors (rolling blends of futures contracts that trade like stocks). See this post for a complete list.  See  How to short VXX for specifics on shorting VXX.
  • Options on VXX, VXZ, UVXY, SVXY
  • Inverse funds that attempt go up when volatility goes down
    • VelocityShares’ XIV ETN  (goal—daily short term inverse returns).  Looks like a good vehicle for this.  More info here.
    • ProShares’ SVXY ETF  (goal—daily short term inverse returns).  This is the only Exchange Traded Fund (as opposed to a Exchange Traded Note) in this area.
    • VelocityShares’ ZIV ETN  (goal—daily medium term inverse returns).   More info here.
    • Barclays’ IVOP ETN  (short of VXX that started trading 16-Sept-2011).   More info here.  Not Recommend—low leverage.
    • Barclays’ XXV ETN (short of VXX that started trading 19-July-2010).  Not recommended—very low leverage.  More info here.
  • CVOL (leveraged blend of futures contracts plus short S&P500 position). More info here.

All of these choices can be at least theoretically used to bet that the VIX index will go down.  Futures contracts or VXX can be shorted, VIX or VXX puts can be bought, or calls shorted, and XIV can be bought directly.

All of these choices have significant problems.

  • None of them track the VIX index particularly well, they tend to lag the index considerably
  • VXX can be hard to short (Schwab has had it in their “Hard to Borrow” category for a long time) and you can’t short stocks / ETFs/ETNs in an IRA account.  Fortunately XIV, SVXY, and ZIV are available,
  • Long VIX / VXX options have serious time decay issues—if the VIX doesn’t drop when you expect your positions bleed money.
  • Because volatility products are relatively volatile the premiums on options tend to be expensive.
  • Unhedged short positions leave you exposed to losses larger than your initial investment if you forecast incorrectly.  Your losses if the index spikes won’t be unlimited because nothing goes up infinitely, but it could be enough to really hurt.  Even the lethargic VXX managed rallies of around 2X in 2010 and 2011.

On the positive side of betting that the VIX index will go down, the VIX index and all of its proxies show mean reversion.  After it spikes up, fear always subsides, and any surviving short position would reduce its losses over time and potentially turn profitable—assuming you didn’t get in when the VIX index was really low.

Better yet, short positions on VXX or similar products will also profit from the contango associated with the volatility futures these products are based on.

If you decide you want to go short on the VIX index, I think it makes sense to limit your potential losses if volatility spikes, either with stop loss orders, or with VIX or VXX OTM calls that would really kick in to limit your losses.  Stop loss orders are scary because if the market is gapping you might lose quite a bit more than your stop loss order would suggest.   For example if you are short VXX at 40 and your stop loss is set at 42, your order might fill at 44 if the market gaps down significantly at opening.   The type of stop loss order that becomes a limit order rather than a market order when triggered prevents this scenario, but opens you up to an even worse loss if volatility continues to spike and never trades at your limit price.

Even though it is scary, I think a stop loss order would probably work well. At least looking back over the last couple of years, including the flash crash, the market was orderly enough to prevent large losses if reasonable stop loss orders had been in place.



FAQ on VIX, the “Fear Index”

Monday, February 18th, 2013 | Vance Harwood
 
  • Why do they call the VIX Index the “Fear Index” or “Fear Gauge”
    • Because the VIX almost always goes up when the market goes down. The scarier the decline the higher the VIX tends to go. In the worst part of the 2008/2009 bear market it went as high as 80. In strong bull markets it historically bounces between 10 and 15.
  • How can I get quotes for the VIX?
    • For Yahoo Finance use ^VIX
    • For Schwab use $VIX
    • For Fidelity use VIX
    • Google Finance use INDEXCBOE:VIX
    • For VIX options quotes—check your broker’s home page, Yahoo Finance (where they seem to come and go), or here
  • How can I buy or short the VIX Index?
    • You can’t short VIX directly.  It is a computed index like the Dow Jones Industrial Average, but instead of stocks this index is related to option prices on the S&P 500 index (SPX). As the options get relatively pricier the VIX index goes higher.
    • You can short VIX indirectly, with proxies that correlate fairly well with the VIX index.  See “Going short on VIX” for details.
  • Is there any way to speculate on the VIX?
    • You can buy options and futures on the VIX. I have not done futures trading on the VIX, but I have done VIX options. While not inherently riskier than options on stocks, these options have some unusual wrinkles and characteristics that you should know about. For example the VIX options typically don’t follow the VIX itself all that well on most days—they tend to not drop as rapidly as the VIX index itself, or climb as fast. This can be really frustrating! In addition the “spread”—the difference between the cost to buy and to sell is quite high on these options. This is never in your favor–this makes it harder to make a profit, but be aware you don’t have the pay the listed prices, you can often buy or sell close to the midpoint of these two prices.
    • There are also multiple ETNs (Exchange Traded Note) and ETFs that are intended to track the VIX index. See Volatility Tickers for a complete list. These trade like stocks (however sometimes they are hard to short).   VXX doesn’t do a particularly good job of tracking the VIX.  It doesn’t jump as much as the VIX in scary times, and structurally it is fated to lose value over time.   It is best suited for short term positions.  See “How to go long on VIX.
    • In addition, XIV is an ETN that is designed to deliver the inverse daily return of  VXX.  This is a good choice when you think the VIX index is going to drop.  See here for more information.
  • Why don’t VIX options track the VIX?
    • For a typical options marketplace to function the option market makers need to be able to buy or sell the thing the options are based on (this is called the “underlying”).  So far no one has figured out how to make the VIX index investible—it is a computed index that can’t be cost effectively replicated in the real world.  Since the VIX index isn’t practical as an underlying VIX options are based on volatility futures that are traded on commodity exchanges.   These volatility futures typically lag the VIX index in both directions, up and down.
    • In normal situations the next volatility future to expire will move about 50% of the VIX index (e.g., if the VIX increases 4% the futures will probably move about 2%).
    • To track the price of the VIX options underlying future for a given month, look at the $10 strike call for that month, split the bid/ask price and add 10.  That will give you a good estimate of the current future’s price.

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