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Options Jive

Different Types of Drag

Dec 16, 2015

No this isn’t a segment about men dressed as women but instead we're examining different types of drag here, ones that affect ETFs and ETNs (exchange traded notes) and we tell you what you need to know when trading them. TP joins the boys to help explain this segment that is a must see for those who trade the ETFs or ETNs in question.

ETFs and ETNs that track certain futures products will experience a drag. That drag though might behave differently than you would expect. We’ll explain so you won’t be surprised.

First discussed is the VXX. It is an ETN that is comprised of front and back month /VX futures. It tracks short term volatility. The weighting of front and back month futures changes on a daily basis, and whether the futures are in contango or backwardation impacts the performance of the fund.

A table showing that the VXX (VIX ETF) portfolio holds a certain percentage of its portfolio in front and back month /VX futures was displayed. The table included the January and February /VX (VIX Future) contracts and the percent weighted in the VXX portfolio of both. Where the VXX is in its roll cycle affects the returns and this is explained in detail.

UNG and USO also experience a drag but it is less “predictable” than the drag experienced by VXX.As opposed to the rebalancing that VXX goes through on a daily basis UNG and USO have a 4 day window in which the fund manager rolls from one contract to the next. Also, there is no weighting. The funds are fully invested in the front month until the roll occurs and then are fully invested in the next month.

A graph of Crude Oil (/CL) versus the USO (Oil ETF) was displayed. The graph compared the price of the /CL front month and back month to the price of the USO. The impact of the drag was fully explained. An example was also provided using the trading platform.

Watch this segment of “Options Jive” with Tom Sosnoff, Tony Battista and Tom Preston for the takeaways and other insights on how different ETFs and ETNs are affected by different types of drag.

This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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