“The S&P 500 VIX Short-Term Futures Index measures the return from a daily rolling long position in the first- and second-month VIX futures contracts, resulting in a constant one- month maturity profile.”
“The S&P 500 VIX Mid-Term Futures Index measures the return from a daily rolling long position in the fourth-, fifth-, sixth- and seventh-month VIX futures contracts, resulting in a constant five-month maturity profile.” S&P Press Release
The VIX measures options on the S&P 500 or its implied volatility. It is inversely related to the stock market and will spike if the S&P 500 gets dumped. When market participants become anxious the market gets volatile and option prices are bid up to play the swings. When we were in a steady bull market from 2002-2007 the options on the S&P were very cheap since there were no big moves in the index. A few years ago CBOE rolled out VIX futures and option contracts on those futures. VIX futures trade differently than the VIX spot price. There are risks involved with these ETNs, read the articles and fact sheets below for more information.
I started watching the VIX when it hit all time lows (under 10) in early 2007. Veteran investors were warning about future market volatility and were shorting the indices. I wish I could find the Forbes article but they were loading up on DXD (short Dow Jones Industrials) and getting ready for an upsurge in volatility and a market correction. They were 6-8 months early but they made a killing if they held through 2008. If the investors bought VIX futures they would have magnified their gains since volatility exploded by the end of 2008 due to the collapse of the banking sector. Look at this 2 year chart comparing the VIX (spot) and S&P on a percentage basis. I also charted out the technicals and it looks like it's building up a wedge waiting for a big move. Hopefully it breaks down to test the 200 day moving average, makes lower lows, the S&P rallies to 1000 and Nouriel Roubini puts spike 3200%. Here's the ^VIX quote at Yahoo Finance.
These ETFs will be a great way to hedge against market crashes or even as a speculative short to play a market bottom. Check out the Volatility Sonar report via OptionMonsterTV which gives updates from the VIX pit.
So will the VIX ETN be a good tool for retail investors to hedge against market volatility? It looks like the ETN won't realize the FULL potential of VIX spot spikes since they are futures but I still like the idea. Another thing... These notes would be backed by Barclays which is having some issues at the moment. Maybe they should wait a month or two.
Pair Of VIX-Tracking ETNs On The Way (IndexUniverse)
Benchmarks For VIX-Tracking ETNs Ready To Go (IndexUniverse)
VIX Futures White Paper (PDF,CBOE.com)
S&P VIX Futures Indices (PDF Fact Sheet)
Using intraday Vix reversals to spot intraday market reversals… over, and over, and over… (Hawaii Trader)
Potential New VIX Product — Beware!! (Don Fishback)
New VIXes On Tap? (Daily Options Report)
Barclays VIX ETNs Slated to Begin Trading on Friday (Vix & More)