"Unlike equity indices, VIX futures are not in the long-term expected to deliver positive returns. VIX futures are not guaranteed to go down either ... Contango is a natural feature of any futures market. Therefore he who would take a long position in VIX must occasionally bear the cost of contango."
“I bought VXX as a play on volatility. But a week went by, two weeks, and the price went down," says Robert Whaley - known as the father of the "fear index" - who is very much not a fan of VIX Short-Term Futures ETN.
"Buying this is about the dumbest thing you could do," he says, after some prospectus digging revealed the product is more or less programmed to go to zero over time.
Whaley - recently signed on as a partner in AccuShares Investment Management - has his own product to sell as that firm has volatility ETFs in the works. The AccuShares Spot CBOE VIX Up Shares and VIX Down Shares are theoretically designed to do a better job tracking the CBOE Volatility Index, and could launch as soon as this summer.
The CBOE - hoping to attract business from Europe and Asia, not to mention cater to U.S. traders operating in the middle of the night when a good deal of major news breaks - has now extended the trading hours of its highly profitable volatility futures to nearly 24 hours per day.
Trading will be continuous between Sunday at 6 PM ET until Friday at 4:15 PM, with the exception of a 15 minute break each day starting at 4:15.
Prior to the change, the market had been open from 3 AM on each day, and about 7.5% of contracts changed hands outside of regular U.S. hours.
Don't fear the lack of fear, options strategist Larry McMillan tells clients who may be worried about the VIX trading below 12 for about the first time since 2007. While this sort of complacency typically sets the stage for a short-term correction, focus on the bigger picture, says McMillan: Stocks can and have advanced as long as volatility remains trendless.
“These buyers of protection are hurting, having lost virtually all of the money that they’ve spent on protection in the last year and half, or more. Yet it seems as that as long as there is a heavy penchant for this protective put buying, the stock market will continue to rally."
Bets on a decline in the iPath S&P 500 VIX Short-Term Futures ETN (VXX -1%) have fallen to 25% of shares outstanding from a record 126% in February, according to Bloomberg. Shorting the VXX is a play on continued calm in the markets, and a bet (along with other short volatility moves) that earned plenty of coin in 2013.
The VIX jumped 4.4% yesterday as stocks struggled, but has closed below 15 for 24 consecutive sessions, the longest streak since about the time surrounding the start of 2014. It hasn't climbed above 18 since February even amid Russian tension and sizable selloffs in small caps and tech momentum names.
“The longer you go without a hurricane, the more likely it becomes for the next period,” says Mark Yusko, CIO at Morgan Creek Capital. “It’s usually around those times, when everybody is convinced nothing can happen, that something happens. Markets tend to move to extremes. Those alligator jaws don’t stay open forever. They eventually snap shut.”
Selling volatility in 2012 and 2013 has funded many a vacation home, but one favorite - the VelocityShares Daily Inverse Short-Term Futures ETN (XIV) - is down 5% this year
"The absence of net sellers of VIX is remarkable," writes the team at SocGen, noting historically, hedge funds - with long equity positions elsewhere - "have a strong natural bias toward net selling the VIX." Given a market in contango, it pays even more to be short, yet they still aren't.
The risk of a spike in volatility thanks to geopolitical tensions with Russia may be having an influence, but alone don't explain the trend, says SocGen, which concludes the period of low volatility is coming to and end.
The CBOE: Where fear never sleeps. Beginning June 22, futures action in the VIX will be available nearly around the clock, with trading beginning on Sunday evenings and not shutting down until Miller Time on Fridays.
The calculation of the actual VIX, however, will only take place during regular U.S. trading hours, says the exchange.
This Ultra ProShares ETF seeks a return that is 2x the return of an index or other benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Investors should monitor their holdings consistent with their strategies, as frequently as daily.
See more details on sponsor's website