Volatilitis Diagnosis

Comments

• scott

  September 2012 edited September 2012

  I'd suggest not looking at TVIX or a number of the VIX-related products, for reasons such as the ones discussed in this article.
  http://seekingalpha.com/article/676731-tvix-surges-but-investors-should-stay-away
  
  http://seekingalpha.com/article/453971-tvix-etn-sell-off-explained
  
  Article on TVIX and huge debate in the comments section:
  http://kiddynamitesworld.com/tvix-you-mess-with-the-bull-you-get-the-horns/
  
  Some of the products that are "VIX-hedged" S & P 500 etfs are somewhat more compelling, but I'd stay away from ETNs and only look at ETFs.
  
  Might the VIX jump because it is at historically low levels? Sure, but the ability to track it accurately by a number of these vehicles (especially TVIX, which - as bad it has been - is also trading with a premium on top of it) has been called into question. These are also definitely NOT long-term holdings, and are much more short-term trading vehicles if used. Apparently this is in the prospectus of TVIX (I haven't read it): “The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment.”
  
  Here's an article that also discusses the low volaility lately and why it may continue:
  http://www.ifre.com/a-new-regime?/21037545.article
  
  Or, as a commenter on Seeking Alpha noted at the link above, "Volatility is a thing of the past. Meetings, debate, printing money, and leveraging copious amounts of debt is obviously the recipe for a healthy, stable global economy."
  
  Are you pondering buying VIX vehicles as a hedge or more as a trade? If you are looking to hedge, I'd rather short the market. Eventually Hussman may be right, but I question how well his strategy will capture that eventual rightness - as I noted before, it's not as if Hussman is making some bold bet that will pay off huge if he's eventually right.
  
  If you are looking at a hedge, then it becomes orchestrating a balance between your current risk and your desired hedge, which is to say, you don't want to Hussman yourself.
  
  _______________________________
  
  The other issue with VXX is that I'd be curious if you get a K-1 tax form for holding it (probably not since it's an ETN, but the fact that it's an ETN presents other risks.) Some of the futures ETFs, such as the commodities futures ETFs (DBA, DBC, USCI, GCC) do have the delightful suprise of a K-1 form at tax time, which is why I will never use commodities ETFs again. I don't mind (don't like, but don't mind that much) K-1s for long-term investments such as MLPs, but I think they are upsetting for holding what are essentially trading vehicles.
  
  The Proshares volatility funds do generate a K-1. I don't think VXX is structured in a way that generates a K-1, but it's a matter of just a note to be careful about the possibility of an unexpected paperwork annoyance at tax time with some of these trading vehicles.
• VintageFreak

  September 2012

  Can you please tell me why K-1 is a such a nuisance? Can't something Turbo Tax not handle it. I find all tax forms a nuisance.
  
  I did do some reading, thank you! I'm going to get hell out of dodge (VXX) as soon as I can.
• kv968

  September 2012

  I've traded TVIX and currently VXX options to some success but I wouldn't use TVIX as an "all or nothing/I'll make my money back quick" option. As a matter of fact I don't think I'll trade TVIX anymore period. It's bad enough when you're using a futures based ETF/ETN but when you add leverage to it, it can be nothing but trouble and not act anything like the way you think it will. It may for one day (and even then it doesn't always act "appropriately") but that might be it.
  
  VXX seems low since the VIX itself IS actually somewhat low compared to its historic averages. However that's the "spot price" of the VIX and VXX, as I'm sure you're aware of, "invests" in short-month futures of the VIX. Those prices aren't anywhere near the spot price of the actual VIX and are in pretty heavy contango.
  
  For example, the Oct. futures price, which VXX will be rolling into shortly is 16.2% higher than current Sept. futures price. And the Nov. price is 12.3% higher than the Oct. So if there's not a significant move in the future implied volitility, all VXX is going to do is lose money.
• kv968

  September 2012 edited September 2012

  As far as what to do, if you think the market is going to drop, try an inverse S&P ETF such as SH. If you want to add the possiblity of making some money off of increased volitility and/or the S&P declining, do your own volitility trade and try buying a put on the S&P. I know this is a fund board but I just wanted to throw that out there.
  
  You can get a Jan 13 at the money put on the S&P for about $600 and with historic and implied volitility levels very low it's cheap and with just an uptick in volitility you'd make money.
• scott

  September 2012

  Reply to @VintageFreak: The K-1 is a bother from the standpoint that it's just more paperwork, but the added bother - I think - is that there have been instances where they do not show up until early April, so you have to sit and wait until they arrive to include the information. For those who like to prepare taxes earlier, that can be a bother. Additionally, and maybe it's just my philosophy, is that I don't like getting a entire piece of tax paperwork from one shorter-term trade, and that's why I will not use the commodity ETFs again. I don't like it, but don't mind it as much when it's something that's more of a long-term investment, like the MLPs, almost all of which generate one.
  
  Options, as kv968 notes below, would be an interesting ... option.