The Major difference between the $VIX and VXX is this: The $VIX
measures the premium the market as a whole is getting for options
that are being sold. This is calculated automatically, like other
indicies. Many large funds and firms like to hedge their overall
market positions and found the VIX moved opposite to the market in
general (a negative correlation). So, the exchange responded by
creating a futures contract (VX) which was tied to the $VIX as it's
underlying security. As the $VIX rose, the contract would have more
value and it's price would rise. However, they added a feature to
this contract not normally seen in the USA; they made the contract
conform to European Style of contracts rather than the American
Style of contracts. What difference does this make, you ask?
A European contract cannot be called away from the seller until
the end of the month, while an American Style contract may be
called away (assigned) before it's expiration date. While this
sounds like a little detail, it has the effect of not moving prices
in step with the $VIX on those futures contracts (VX). This gives
the buyer and seller quite a bit more discretion in determining
price for the duration of the contract, except during the last day
or so of expiration. Only at expiration -settlement, does the price
of the contract have to come close the $VIX index. (It's actually
the first tick of the Wednesday after the Tuesday the contract
expires, but that's too much detail). So, that explains why the VX
futures contracts don't exactly track the $VIX. Now, why doesn't
VXX track the $VIX?
Since the $VIX is tradeable only through the VX futures
contract, an ETF/ETN must have an underlying security on which to
trade, meaning something has to have a real value attached to it
when creating a financial derivative product. So, the stock of the
ETF VXX uses the VX contracts and it (the VXX) needs to track
the price of the underlying. Hence the VXX is a proxy for the VX
contract which approximates the $VIX like it's being held together
with a mile long rubber band.
I hope this explains why you see the difference between the 4%
upmove in the $VIX and the 0.8% down move in the VXX. You can
explain it away as 'anticipation'. Buyers and sellers are
anticipating what the contract price will be near expiration rather
than what it will be tomorrow.
BTW: The VIX Options are tied to the VX contract, so, it doesn't
offer any tighter relationship to the $VIX than VX.
I have not traded this nor even looked at a chart on it, but
this may become a better alternative to VXX for trading the
VIX.
Jefferies Asset Managementis best known in the ETF space for
its funds focusing on equities of commodity producers and companies
engaged in commodity-intensive businesses. The Connecticut-based
issuer hasfiled to offerthe Jefferies S&P 500 VIX
Short-Term Futures ETF (VIXX), a product that would seek to
replicate the performance of a benchmark comprised of futures on
the CBOE Volatility Index, or VIX.
The VIX, known to some traders as
the “fear index,” is designed to estimate expected volatility in
large cap U.S. stocks over the next 30 days by averaging the
weighted prices of call and put options on the S&P 500. The VIX
has historically traded near a value of 20, but spiked to above 80
during the recent financial crisis. Since hitting an all-time high
in late 2008, it has slowly retreated towards its long-term
average.
VIXX could become the first ETF to
offer exposure to equity market volatility, although two
exchange-traded notes (ETNs) fromBarclays iPathalready cover this space. The iPath
S&P 500 VIX Short-Term Futures ETN (VXX) is linked to a rolling index
consisting of near month and second month futures contracts on the
VIX, while the Mid-Term Futures ETN (VXZ) is linked to a benchmark made up
of fourth-, fifth-, sixth-, and seventh-month futures
contracts.
Since they were launched in January 2009, VXX and VXZ have
been two of the worst performing ETFs, but also among the most
popular.VXX has lost about 80% over the last year,
although it spiked nearly 10% in Tuesday trading after turmoil in
Europe sent global equity markets plummeting.
The slide in VXX has been driven by two powerful factors,
including a slide in the underlying VIX index and steep contango in
VIX futures markets. Second month VIX futures contracts often trade
as much as 15% higher than near month futures, creating strong
headwinds for investors in these products (seeThree ETFs That Could Be Crushed By Contango).
This contango makes VIX-based
exchange-traded products unattractive for long-term investors, but
the VIX ETNs from iPath have been big hits with investors seeking
an insurance policy against turmoil in stock and bond markets. The
correlation between VXX and SPY has been close to -1.0 since
launch, making VXX a valuable tool for investors looking to smooth
out bumps and add some real diversification to a traditional
stock-and-bond portfolio. At the end of March, VXX and VXZ had
assets of about $1.2 billion and $470 million, respectively. The
two products took in about $1.3 billion in cash inflows in the
first quarter (seeVXX: The New UNG?).
Similar, But Different
VIXX would be similar to VXX, but
different in a few key areas. First, VIXX would be structured as an
ETF, meaning that its underlying holdings would consist of futures
contracts (and potentially other instruments). VXX, on the other
hand, is an exchange-traded note; a senior, unsecured debt security
issued by Barclays Bank that is subject to credit risk. Another big
difference between the proposed VIXX and the existing VXX is the
fee structure; the Jefferies product would charge an expense ratio
of just 0.49%, or 40 basis points lower than the iPath
products.
Also, VXX tracks the front month futures contract. It must roll
over into the next month contract every time the futures roll. With
future months VIX priced higher than the current month there is an
expense incurred in that process which affects the VIX price,
called negative roll yield. Trading VIX during futures expiration
week can be tricky due to this and is another possible explanation
for VIX being up and VXX being down today.
There have been other, detailed, posts regarding VXX and futures
expiration. A serch under VXX should find them.
So...if next Tuesday is expiry of the current VX contract the
VXX will converge with $VIX more precisely Wednesday morning?
Or never as it will now loosely conform to the Dec VX contract?
The Real Difference between the VIX and VXX
Posted by klatuu on 15th of Sep 2010 at 03:43 pm
Pebs,
The Major difference between the $VIX and VXX is this: The $VIX measures the premium the market as a whole is getting for options that are being sold. This is calculated automatically, like other indicies. Many large funds and firms like to hedge their overall market positions and found the VIX moved opposite to the market in general (a negative correlation). So, the exchange responded by creating a futures contract (VX) which was tied to the $VIX as it's underlying security. As the $VIX rose, the contract would have more value and it's price would rise. However, they added a feature to this contract not normally seen in the USA; they made the contract conform to European Style of contracts rather than the American Style of contracts. What difference does this make, you ask?
A European contract cannot be called away from the seller until the end of the month, while an American Style contract may be called away (assigned) before it's expiration date. While this sounds like a little detail, it has the effect of not moving prices in step with the $VIX on those futures contracts (VX). This gives the buyer and seller quite a bit more discretion in determining price for the duration of the contract, except during the last day or so of expiration. Only at expiration -settlement, does the price of the contract have to come close the $VIX index. (It's actually the first tick of the Wednesday after the Tuesday the contract expires, but that's too much detail). So, that explains why the VX futures contracts don't exactly track the $VIX. Now, why doesn't VXX track the $VIX?
Since the $VIX is tradeable only through the VX futures contract, an ETF/ETN must have an underlying security on which to trade, meaning something has to have a real value attached to it when creating a financial derivative product. So, the stock of the ETF VXX uses the VX contracts and it (the VXX) needs to track the price of the underlying. Hence the VXX is a proxy for the VX contract which approximates the $VIX like it's being held together with a mile long rubber band.
I hope this explains why you see the difference between the 4% upmove in the $VIX and the 0.8% down move in the VXX. You can explain it away as 'anticipation'. Buyers and sellers are anticipating what the contract price will be near expiration rather than what it will be tomorrow.
BTW: The VIX Options are tied to the VX contract, so, it doesn't offer any tighter relationship to the $VIX than VX.
Klatuu
Title: New VIX Tracking Product I
Posted by pthoreson on 15th of Sep 2010 at 05:40 pm
I have not traded this nor even looked at a chart on it, but this may become a better alternative to VXX for trading the VIX.
Jefferies Asset Management is best known in the ETF space for its funds focusing on equities of commodity producers and companies engaged in commodity-intensive businesses. The Connecticut-based issuer has filed to offer the Jefferies S&P 500 VIX Short-Term Futures ETF (VIXX), a product that would seek to replicate the performance of a benchmark comprised of futures on the CBOE Volatility Index, or VIX.
The VIX, known to some traders as the “fear index,” is designed to estimate expected volatility in large cap U.S. stocks over the next 30 days by averaging the weighted prices of call and put options on the S&P 500. The VIX has historically traded near a value of 20, but spiked to above 80 during the recent financial crisis. Since hitting an all-time high in late 2008, it has slowly retreated towards its long-term average.
VIXX could become the first ETF to offer exposure to equity market volatility, although two exchange-traded notes (ETNs) from Barclays iPath already cover this space. The iPath S&P 500 VIX Short-Term Futures ETN ( VXX ) is linked to a rolling index consisting of near month and second month futures contracts on the VIX, while the Mid-Term Futures ETN ( VXZ ) is linked to a benchmark made up of fourth-, fifth-, sixth-, and seventh-month futures contracts.
Since they were launched in January 2009, VXX and VXZ have been two of the worst performing ETFs, but also among the most popular.VXX has lost about 80% over the last year, although it spiked nearly 10% in Tuesday trading after turmoil in Europe sent global equity markets plummeting. The slide in VXX has been driven by two powerful factors, including a slide in the underlying VIX index and steep contango in VIX futures markets. Second month VIX futures contracts often trade as much as 15% higher than near month futures, creating strong headwinds for investors in these products (see Three ETFs That Could Be Crushed By Contango ).
This contango makes VIX-based exchange-traded products unattractive for long-term investors, but the VIX ETNs from iPath have been big hits with investors seeking an insurance policy against turmoil in stock and bond markets. The correlation between VXX and SPY has been close to -1.0 since launch, making VXX a valuable tool for investors looking to smooth out bumps and add some real diversification to a traditional stock-and-bond portfolio. At the end of March, VXX and VXZ had assets of about $1.2 billion and $470 million, respectively. The two products took in about $1.3 billion in cash inflows in the first quarter (see VXX: The New UNG? ).
Similar, But Different
VIXX would be similar to VXX, but different in a few key areas. First, VIXX would be structured as an ETF, meaning that its underlying holdings would consist of futures contracts (and potentially other instruments). VXX, on the other hand, is an exchange-traded note; a senior, unsecured debt security issued by Barclays Bank that is subject to credit risk. Another big difference between the proposed VIXX and the existing VXX is the fee structure; the Jefferies product would charge an expense ratio of just 0.49%, or 40 basis points lower than the iPath products.
Title: VXX closing negative while
Posted by pthoreson on 15th of Sep 2010 at 05:07 pm
Also, VXX tracks the front month futures contract. It must roll over into the next month contract every time the futures roll. With future months VIX priced higher than the current month there is an expense incurred in that process which affects the VIX price, called negative roll yield. Trading VIX during futures expiration week can be tricky due to this and is another possible explanation for VIX being up and VXX being down today.
There have been other, detailed, posts regarding VXX and futures expiration. A serch under VXX should find them.
Thanks, I needed that, Klatuu! So...if
Posted by 4iron on 15th of Sep 2010 at 04:39 pm
Thanks, I needed that, Klatuu!
So...if next Tuesday is expiry of the current VX contract the VXX will converge with $VIX more precisely Wednesday morning? Or never as it will now loosely conform to the Dec VX contract?
Thanks!
Thanks for the explanation.....I have
Posted by hawkinslf on 15th of Sep 2010 at 04:05 pm
Thanks for the explanation.....I have been wondering about the divergence as well as I am holding VXX as a hedge.