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Though the share price is down 67% YTD, the number of shares issued for the VIX ETN (VXX)...
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Thursday, August 16, 2012, 10:52 AM ETThough the share price is down 67% YTD, the number of shares issued for the VIX ETN (VXX) has soared sixfold to 142M. Trading volatility is the equivalent of competing in the deep end of the pool - unless you're Mark Spitz (showing our age, let's make it Michael Phelps), you may want to avoid.
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The SEC can ignore it because it is an ETN which clearly discloses that it is expected to be worthless at redemption. It is billed as a trading vehicle NOT an investment. People still have an obligation to READ the prospectus.
Agreed that it is ultimately the individuals's responsibility - I also believe that market forces will ultimately rid these products from the market. That said, IMO this is a black-and-white issue and very low-hanging fruit for the SEC. Requiring disclosure does not mitigate their responsibility to protect the consumer. The SEC regulates products that are guaranteed to increase in value (nominally) more than these. These products are suitable for no one - they simply steal money from uneducated speculators and wannabe hedgers -- while occasionally rewarding luck.
If you buy OTM puts to protect downside on a stock, you usually expect that the most likely outcome is that they expire with zero value and certainly consider the probability that you will sell them at a lower price than which you bought. Hedging has a cost over the long term just as insurance has a net cost over the long term. The argument should be over whether VXX is a tool that is inefficient or too costly rather than whether there is a cost to hedging.
My experience has been that VXX options can replace some of my buying of specific puts or address portfolio concerns (mainly broad, global event risk) when I will not actively manage my portfolio. I suggest any moderately active investor should try buying 100 VXX shares at the current price level and buy/sell VXX options to get a cheap education and feel for the issues. For example, buy 100 VXX at $11.25 Sell a Jan 13 $15 covered call at $1.15 - Buy a Jan 2013 put at $8 for $.45. Yes, you can lose about $375 if VXX falls to $8 but I would predict that if you have an underlying portfolio of stock that it will being doing OK and markets will be settled and bullish. If you are in the money on the call at maturity, you probably will have suffered some deterioration in your underlying equity portfolio.
One thing that you will see is the concentrated spiking upwards and relatively slow descent back to 10 -15 range. You will see when studying charts that it is normal that the cost of going into VXX is quite high when panic has already rattled the market.