Trading stock market volatility is not for the faint of heart.
And if you're a volatility trader, you've either personally
experienced or are at least aware of the performance discrepancies
between the CBOE S&P 500 Volatility Index (ChicagoOptions:^VIX)
and VIX exchange-traded products (ETPs) like the iPath S&P 500
VIX ST ETN (NYSEARCA:VXX).
Leading up to the last minute agreement by U.S. politicians to
suspend the debt ceiling, we alerted our readers to own volatility
by using VIX call options, not VIX ETPs. While most of Wall Street
was in a holding pattern, we recognized a significant profit
opportunity and we pounced.
Not only did we bag a 30% gain on the above mentioned VIX call
options three-week trade that began on Sep. 23 and ended on Oct.
14, but we were right in the thick of the perfect storm.
For the one-month ending Oct. 15, the VIX easily beat all major
asset classes with a sizzling 29.4% gain. Over that very same
tumultuous period, the S&P 500 (NYSEARCA:SPY) was modestly down
-0.36% and gold (NYSEARCA:GLD), an alleged safe-haven, was down
even more by -2.15%.
But through this turmoil, VIX focused ETPs badly trailed the
The latest prospectus (dated July 31, 2013) for the ProShares
VIX Short-Term Futures ETF and the ProShares Ultra VIX Short-Term
Futures ETF (NYSEARCA:UVXY) allude to some of the problems with
getting VIX exposure via ETPs.
Here are a few excerpts:
"High volatility may have an adverse impact on the VIX Funds
beyond the impact of any performance-based losses of the
underlying indexes, especially the geared (or leveraged) fund may
perform differently than the Short-Term Index."
"The VIX Funds are benchmarked to the Short-Term Index. They
are not benchmarked to the VIX or actual
realized volatility of the S&P 500. The level of the
Short-Term Index is based on the value of the relevant futures
contracts ("VIX futures contracts") based on the Chicago Board
Options Exchange, Incorporated ("CBOE")."
"The VIX is not directly investable."
How did VIXY perform during the stock market's latest bout with
high volatility? From Sep.15 to Oct. 15, VIXY gained just +8.38%
whereas the VIX itself jumped 29.4%.
"Traders need to remember that VIXY gives you exposure to the
front two month VIX futures contracts. There can be a
disconnect in the performance between VIX futures and the VIX index
that results indifferent performance out of VIXY and VIX," said
Russell Rhoads, CFA an instructor with the Options Institute at the
Chicago Board Options Exchange and author of Option Spread Trading:
A Comprehensive Guide to Strategies and Tactics (2011, Wiley).
With roughly $3 billion scattered across 20 different U.S.
listed volatility ETPs, it's safe to say there's a lot of misguided
money chasing volatility.
If you're going to trade stock market volatility or the VIX,
make sure you're on the right roller coaster.
Profit Strategy Newsletter
uses a combination of market sentiment, fundamental/technical
analysis, market history, and common sense to be on the right side
of the market. Since the beginning of the year, 74% of our time
stamped ETF picks have turned a profit and our biggest win was a
+525% gainer. (through 9/30/13)
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P.S. Listen to
Ron DeLegge's radio interview with Russell Rhoads
about ETFs and options strategies