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Volatility Products

In recent years, it has become increasingly common to consider volatility as its own asset class. With this progression, many different volatility products have been invented and are now available to trade. The most common of these products include the VIX, VIX options, VIX futures, VXX, UVXY, SVXY and VXST. The VIX index gauges 30-day implied volatility in SPX and the options on the VIX allow investors to trade their volatility assumptions, whether it is to speculate or hedge portfolio positions.

VIX Futures also allow investors to take advantage of volatility assumptions, except VIX futures are a much larger product in notional terms. This is because when trading one VIX options contract, one point is worth $100, while each point in a single VIX futures contract is worth $1,000. One important point of consideration when trading VIX futures is that there is a cost of carry associated with the product. This is because VIX futures are often in contango (longer-dated contracts trade at a premium to near-term contracts) and this results in an increase in cost-basis when rolling from one month to the next.

VXX (ETN) and UVXY (ETF) both track the daily percent return of a portfolio comprised of the two front-month VIX futures contracts. UVXY is slightly different than VXX because it is 2x leveraged. This means that UVXY will return twice the percentage of VXX on a given day. Both of these products allow investors to gain exposure to volatility by utilizing the underlying stock or options. Of the two products, VXX is much more liquid, but we consider both to be viable products. It's important to note that due to the daily rebalancing of VXX and UVXY that fund administrators must do, these products have a negative drag (due to VIX futures being in contango a majority of the time). This means that over time, the products will drastically underperform the return of VIX futures. For this reason, these products are designed to be used on a short-term basis and not as a buy-and-hold trade.
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