The word volatility gets bandied about quite a bit in the investment world. Volatility is a statistical measure of the distribution of returns for a certain security or market index.
The Volatility Index, or VIX, an instrument created by the Chicago Board Options Exchange (CBOE), is a real-time market index that represents the market’s expectation of a month period of forward-looking volatility. In most cases, the higher the volatility, the riskier the security. Derived from the price inputs of the S&P 500 index options, the VIX provides a measure of market risk and investors’ sentiments. It is also known by other names like “Fear Gauge” or “Fear Index,” as investors, research analysts and portfolio managers generally look at VIX values as a way to measure market risk, fear and stress before they take investment decisions.
When the VIX spikes, it is generally associated with a falling stock market, as investors and traders scramble to unload positions. Inversely, when the VIX declines or even stagnates, this is usually related to a market that is trending upward or consolidating for a period.
Though most investors tend trade or invest in securities that are correlated to the VIX, such as buying or selling stocks or ETFs, investors looking to come as close as they can to trading the index itself would do well to consider the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX).
According to iPath, The iPath Series B S&P 500 VIX Short-Term Futures ETNs (the “ETNs”) as a group are designed to provide exposure to the S&P 500 VIX Short-Term Futures Index Total Return (the “Index”). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.
The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the “VIX Index”) futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants’ views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.For additional information regarding the risks associated with the ETNs, please see “Selected Risk Considerations” below.
While this ETN is certainly not for everyone, it is an interesting way to directly interact with the fear and greed investors display, as demonstrated by the VIX.
For leveraged ideas on how to play volatility, visit our Leveraged & Inverse Channel.