Posted by atlantis on 24th of Jun 2012 at 09:00 pm
Some of the material below has been discussed before on the blog,
however it's always nice to be reminded how playing these products
is sometimes like playing at the casino. The articles below help
understand what goes on behind the scenes.
I found this recent article last Friday that should serve as a risk
reminder to anyone trading VIX ETNs:
You can find more information here about VXX and similar products
such as TVIX (that lost 60% of its value in 2 days in March) and
UVXY (-2x VIX from the article, seems to behave better than TVIX,
note it lost 20% last Friday due to the -10% drop in the VIX).
This second link referred in the article above is of
particular interest. For anyone who is tempted to buy such a
product now thinking the VIX will spike in the next few months with
everything going on in Europe, READ THIS. The degradation of these
ETNs overtime is significant:
"...Pretty clever. However, there's a big catch. When the VIX
futures curve is upward sloping, meaning people expect volatility
to be greater in 2 months than in 1 month and so forth, there's an
ongoing premium that must be paid to continually sell front month
contracts and replace them with second month contracts (which,
themselves, become front month contracts in a few weeks' time).
This situation of more distant futures costing more than near-term
ones is referred to as contango and the buy-high-sell-low situation
it creates is called roll yield. VXX mirrors exactly this strategy,
as is clearly laid out in the prospectus.
Recent impact as of this writing, the VIX futures curve looks as
shown below. All else being equal (i.e, no shifting of the curve),
if you buy a June settlement contract today and hold it for a
month, you can expect that it'll trade at a price similar to what
the May contract is at today. In other words you'd buy at 19.55 and
in a month it would be worth 17.95, a roll yield of about 8%, which
is
analogous to paying an 8% monthly premium to maintain a
front month portfolio."
Due to the "contango" effect, the author suggests to short
VXX...
You have been warned !
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VIX ETNs (VXX, TVIX, UVXY) and behind the scene education
Posted by atlantis on 24th of Jun 2012 at 09:00 pm
Some of the material below has been discussed before on the blog, however it's always nice to be reminded how playing these products is sometimes like playing at the casino. The articles below help understand what goes on behind the scenes.
I found this recent article last Friday that should serve as a risk reminder to anyone trading VIX ETNs:
http://seekingalpha.com/article/676731-tvix-surges-but-investors-should-stay-away?source=yahoo
You can find more information here about VXX and similar products such as TVIX (that lost 60% of its value in 2 days in March) and UVXY (-2x VIX from the article, seems to behave better than TVIX, note it lost 20% last Friday due to the -10% drop in the VIX).
This second link referred in the article above is of particular interest. For anyone who is tempted to buy such a product now thinking the VIX will spike in the next few months with everything going on in Europe, READ THIS. The degradation of these ETNs overtime is significant:
http://seekingalpha.com/article/267950-ipath-s-p-500-vix-short-term-futures-etn-swimming-against-the-currents
Here's a sample from this last link:
"...Pretty clever. However, there's a big catch. When the VIX futures curve is upward sloping, meaning people expect volatility to be greater in 2 months than in 1 month and so forth, there's an ongoing premium that must be paid to continually sell front month contracts and replace them with second month contracts (which, themselves, become front month contracts in a few weeks' time). This situation of more distant futures costing more than near-term ones is referred to as contango and the buy-high-sell-low situation it creates is called roll yield. VXX mirrors exactly this strategy, as is clearly laid out in the prospectus.
Recent impact as of this writing, the VIX futures curve looks as shown below. All else being equal (i.e, no shifting of the curve), if you buy a June settlement contract today and hold it for a month, you can expect that it'll trade at a price similar to what the May contract is at today. In other words you'd buy at 19.55 and in a month it would be worth 17.95, a roll yield of about 8%, which is analogous to paying an 8% monthly premium to maintain a front month portfolio."
Due to the "contango" effect, the author suggests to short VXX...
You have been warned !