The Skew Slew and Volatility Bubble (VXX, VIXY)

“The slew of new volatility products continues, feeding what some are even calling a “volatility bubble.”  ProShares announced this week that they will roll out VIX-based exchange-traded funds. These will be very similar to existing products, but as ETFs they will not have the credit risk of exchange traded notes such as Barclays’ iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX). The (VXX) is the oldest ETN of this type, having rolled out in February 2009, and has by far the most volume and interest.  One of the forthcoming ProShares products, the ProShares Trust VIX Short-Term ETF(NYSE:VIXY), will track the same index and should have similar returns. But it won’t expose investors to risk if something should happen to Barclays,” Chris McKhann Reports From Option Monster.

McKhann goes on to say, “Also this week the CBOE announced that it will bring the VIX methodology to individual stocks. We will have volatility indexes on five stocks to start: Amazon, IBM, Google, Apple, and Goldman Sachs.  Finally, the CBOE will introduce what it is calling its S&P 500 Skew Index. This will likely be similar to Credit Suisse’s “Fear Barometer” but will be readily available to those who don’t have access to Bloomberg. This should be a useful indicator, again with the interesting prospect of having a listed product to be able to trade “skew.”

“I don’t know how popular any of these new instruments will be. Some volatility products have been wildly successful, as seen in the VIX and the VXX, but others have flopped as evidenced by the Russell 2000 Volatility Index options. Still, I welcome the rise of volatility products, especially those that bring popular over-the-counter strategies to the listed market.  And while some do see all of this activity as a “volatility product bubble,” that doesn’t necessarily translate into a volatility bubble. Many of these products may crash and burn, but having more players in the market is a good thing–though they may increase the volatility of volatility,” McKhann Writes.

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Visit our Barclays’ iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX) Category: HERE

Visit our ProShares Trust VIX Short-Term ETF (NYSE:VIXY) Category: HERE

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