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
CBOE S&P 500 Volatility Index
(INDEXCBOE:VIX) and VIX exchange-traded products (ETPs) like the
iPath S&P 500 VIX ST ETN
Leading up to the last minute agreement by US politicians to
suspend the debt ceiling, we suggested owning volatility by using
VIX call options, not VIX ETPs. We bagged a 30% gain on the above
mentioned VIX call options three-week trade that began on Sep. 23
and ended on Oct. 14, and were right in the thick of the perfect
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
(INDEXSP:.INX) was modestly down -0.36% and gold, an alleged
safe-haven, was down even more by -2.15%.
But through this turmoil, VIX-focused ETPs badly trailed the VIX.
(dated July 31, 2013) for the ProShares VIX Short-Term Futures ETF
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 (
"The VIX is not directly investable."
ProShares Trust II
(NYSEARCA: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 in
different 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
With roughly $3 billion scattered across 20 different US listed
volatility ETPs, it's safe to say there's a lot of misguided money
If you're going to trade stock market volatility or the VIX, make
sure you're on the right roller coaster.
Editor's note: This story by Ron DeLegge originally appeared on
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