Monday, April 23, 2012

Bill Luby on VIX-Related Exchange-Traded Products

By Tim Husson, PhD

Bill Luby, who writes at the VIX and More blog and Expiring Monthly: The Options Traders Journal, is one of the most respected voices on all things related to the CBOE S&P 500 Volatility Index, also known as the VIX.  We highly recommend anyone interested in the VIX and volatility-related derivates check out his blog, which has a variety of useful analysis and commentary.

Recently there has been a lot of coverage related to TVIX and other exchange-traded products linked to the VIX.  Here at SLCG, VIX exchange-traded products are a continuing research effort, as these products are highly complex yet often sold to unsophisticated investors.  Mr. Luby was interviewed by Bloomberg Structured Notes Briefs in the April 12 edition (ungated version not available for link) and had a lot to say about this issue:
I get a lot of basic questions about VXX or VIX options. Generally, someone buys something and the next day the VIX goes up 10 percent and VXX goes up 1 percent or they have VIX options and they’re unchanged. Then they’ll come to me and say, ‘How come I’m not making money if the VIX is up 10 percent?’ They have no idea that these products are based on VIX futures; they are not familiar with concepts like roll yield, term structure, contango, etc. A lot of people don’t realize you can’t trade the VIX directly. 
They obviously didn’t read the prospectus saying the ‘long-term value of your ETN will be zero.’ I even get hedge funds or people who discreetly don’t want me to know they’re hedge funds looking for background on VIX, ‘What does term structure mean?’ 
There is a level of basic ignorance starting with the retail investor, including advisers, less so now, but definitely in the past, including the hedge fund community as well.
He also suggests that some suitability requirements may be in order:
The knowledge required to trade them effectively is comparable to the knowledge required to trade options or futures. I could see some sort of requirement being cleared for a minimum balance or experience.  This TVIX thing has been a boon for investors’ education. It’s been an expensive education.
As for his readers' trading positions?
I would guess most of the people who read my blog are short the VIX exchange-traded product in a big way.

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