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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?

 
Friday, March 9th, 2012 | 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
  • To go short on VIX buy XIV
    • XIV attempts 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

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How to go long on the VIX index

 
Monday, March 12th, 2012 | Vance Harwood
 

For the average investor there are four ways to go long on VIX:

  1. Buy a leveraged exchange traded product (ETP) that tend to track the daily percentage moves of the VIX index.  At the moment there are three of these:  CVOL, UXVY, and TVIX (currently not recommended).
  2. Buy Barclays’ VXX (short term) or VXZ (medium term) Exchange Traded Note (ETN) or one of their competitors that have jumped into this market.   See volatility ticker for a full list of volatility ETN/ETFs.
  3. Buy VXX or VXZ call options  (recently ProShares VIXY and VIXM began offering options too)
  4. Buy VIX call options / short VIX put options

 

FAQ on VIX, the “Fear Index”

 
Saturday, September 24th, 2011 | 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 Dec 2009 it has been averaging around 22. 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—apparently not available
    • 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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