If things weren’t derivative enough for you before, you can add one more level of indirection to your volatility investments. Options are available on ProShares‘ 1.5X VIX short-term UVXY and their -0.5X inverse short-term SVXY. These options are similar to VXX’s options; they are American exercise style and expire on the same day as equity options. VIX options are European exercise and expire on the same …
At one point I was hazy about the internal workings of leveraged and inverse ETFs, so I constructed models of hypothetical 2X and -1X Apple ETFs to clarify my understanding. I ignored a whole host of issues (e.g., regulatory, cost-effective leverage), but even a simple model of a leveraged ETF can hurt your brain. The basic inverse and leverage mechanisms shown below are essentially the same for …
It’s clear that the volatility ETN/ETFs have begun to dominate the VIX Futures market. What isn’t clear is whether it matters. Volatility isn’t a commodity like gold or corn that is physically limited, so future position limits don’t seem applicable. When the price of VIX futures is attractive, more can be created—and appropriate hedges put in place. But are these hedges distorting the overall market? …
Since Credit Suisse’s recent pause on TVIX share creations I have been trying to figure out some of the hedging / rebalancing dynamics underlying the current crop of volatility ETNs and ETFs. Traditional equity ETFs like SPY, the S&P 500 index tracking fund don’t require much behind-the-scenes action. Shares are created or redeemed in conjuction with baskets of securities changing hands. The only dynamic part …
February 27, 2007, currently holds the biggest daily percentage jump record in the VIX index’s history (the VIX didn’t come out until after the 1987 crash). The VIX jumped from a 11.15 close the previous day to 18.31 —a 59% jump. Normally I would expect a volatility strategy fund like XVZ or, VQTto perform very well during a volatility spike of this magnitude. None of these …
