Opinions
Richard Croft
CBOE Volatility Index
VIX-I
COMMENT
Aug 28, 2017
Stock price when the opinion was issued
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It's another indicator that tells us about nervousness by sensing volatility. If you own the VIX, this is probably a really good time to sell. It's right at the peak that we saw last August.
It's a background thing, not a way to perfect timing. Tells you the neighbourhood you're in, but doesn't tell you what to do. You can look at these moves in terms of standard deviations, and how far away from the average we are. Moves of 2 or 3 don't sound big, but they're actually quite big in terms of deviation from the average.
At his firm, they actually trade the underlying futures contracts as opposed to using the ETF. There are a number of ETFs to go net-long, go net-short, and to leverage on those plays. He can't recommend one, because he doesn't use them.
When you're using the leveraged ones, there's lots of potential adrenaline. They should only be used for very, very short-term views, days to weeks at the most. Never want to hold any leveraged ETFs beyond a few months because of the way they rebalance (buy high and sell low).
For calls on the VIX. What ETF would you use and with what Strike Price and Call Price? There is an exchange traded note, very similar to an exchange traded fund, that is put out by Barclays iShares (VXX-N) that tracks the VIX. The challenge is that it is tracking short term VIX futures, which has been a steady downward turn on the underlying security. The reason is that you are constantly rebalancing the ETN every day based on the 1st and 2nd futures contracts on VIX, which is giving you a drag every day. This is not a long-term hold. It is a security you buy as a hedge against your portfolio. When VIX spikes, it moves 3% to 6% every single day. VXX is a very volatile instrument and a short-term one. Volatility, as an asset class, is about 6X more volatile than equities. That means you don’t need very much of this product to hedge an equity portfolio.