Trading The Volatility In The Market With These VIX ETNs (VXX, VXN)

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June 14, 2010 1:58pm NYSE:VXX NYSE:VXZ

“As we noted last week, the iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSE: VXZ) are exchange-traded notes (ETNs) based on


 CBOE Volatility Index (VIX) futures. (NYSE:VXX) is the far more popular of the two, as it proxies a perpetual 30-day VIX future. (NYSE:VXZ) proxies a daily rolling long position in the fourth-, fifth-, sixth- and seventh-month VIX futures contracts. In order to maintain the proper duration, each of the ETNs must roll out futures from near to far every day. The VIX virtually always trades in contango, that is, the further from expiration, the higher the future price. That has scant impact on (VXZ) as there’s generally little difference between fourth-month and seventh-month VIX futures. But it can wreak havoc on (VXX) as we’ve seen differences as high as 6 volatility points between front month and second month,” Adam Warner Reports From Options Zone.

Warner goes on to say, “We now have options on (VXX) and (VXZ), which just listed within the last couple of weeks, and I find both superior to VIX options. Why? Well, for starters, VIX options give you delivery of … nothing. They cash settle on expiration day and officially leave your sheets forever. (VXX) options deliver (or get delivery of) (VXX) stock. The same goes for (VXZ). You can also exercise them early (and get assigned), whereas VIX options are European exercise. What’s more, the clock never strikes midnight on (VXX). It always tracks a hypothetical one-month future, and thus always has the same basic properties. A VIX option, on the other hand, tracks a normal future, one that behaves very, very differently depending on time remaining until expiration.”

“(VXX) isn’t perfect by any stretch, and there’s a good chance it declines over the course of time, but on a day-to-day basis, it’s reasonable to expect it to capture about 50% of the VIX move. I would say that basically any option strategy that suits you can work in here. (VXZ) is a very different animal. It’s just not going to capture much of any VIX move. A regular future four to seven months out obviously gets closer as time goes on, but (VXZ) stays out there on the curve. And out that far, you just don’t see much movement. The further you go out in time, the more the contract assumes any VIX move is a short-term blip that will mean revert. So you don’t really accomplish much owning (VXZ). It won’t hedge a portfolio well at all. It also won’t decline that much if VIX dips, but that begs the question of why to bother with it to begin with?” Warner Reports.

Chart foriPath S&P 500 VIX Short-Term Futures ETN (VXX)

We have also put together some more details on the iPath S&P 500 VIX Mid-Term Futures Note (NYSE:VXZ) and the iPath S&P 500 VIX Short-Term Futures Note (NYSE:VXX) below:

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

The investment seeks to replicate, net of expenses, the S&P 500 VIX Short-Term Futures Total Return Index. The index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.

Chart foriPath S&P 500 VIX Short-Term Futures ETN (VXX)

iPath S&P 500 VIX Mid-Term Futures ETN (NYSE:VXZ) Visit Our VXZ Category: HERE 

The investment seeks to replicate, net of expenses, the S&P 500 VIX Mid-Term Futures Total Return Index. The index offers exposure to a daily rolling long position in the fourth, fifth, sixth and seventh month VIX futures contracts and reflects the implied volatility of the S&P 500 Index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the fourth month VIX futures contract into the seventh month VIX futures contract. 

Chart foriPath S&P 500 VIX Mid-Term Futures ETN (VXZ)


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