TT - MM: VIX Saved the Cat, 02/21/14

TastyTrade - Market Measures

Is there a correlation between the price of the VIX and being short premium?

We looked at the daily closing price of the VIX between 2005 and 2013 and bucketed the results annually with VIX above and below 15.

VIX vs VXX, UVXY, VXZ, XXV

VIX

• A measure of market expectation of S&P 500 volatility over the next 30 days
• Simply: it measures how much people are willing to pay to buy or sell the S&P 500
• If people are willing to pay more it represents uncertainty in the market
• Counter index: when the market goes down the VIX usually goes up (and quickly)
• A bullish outlook in the VIX is a bearish outlook in the market
• No Underlying, therefore cannot own
• Cash settled
• No bid/ask
• Different expiration dates
• Option premiums are based on a future price, not the current market price
• Future value is close to where the calls and puts are priced the same
• Never trade a calendar in the VIX, what you pay/risk up front is NOT what you can lose

VXX

• An exchange-traded note (ETN) that holds a long position in first and second month VIX futures contracts that roll daily
• Trades like a normal product since it has an underlying that you can own
• Same expiration dates as other equities
• Short-term, not buy-and-hold; long-term holders will experience time decay
• Be more aggressive when closing/rolling
• During periods of low volatility VXX often trades higher than it otherwise should (pricing in an expectation of increased volatility)
• During periods of high volatility it often trades lower than it should (pricing in an expectation of a return to lower volatility)

UVXY

• Trades like the VXX but is double leveraged (Ultra)

VXZ

• Structurally similar to the VXX, but it holds positions in fourth, fifth, sixth and seventh month VIX futures
• Much more a measure of future volatility and tends to be a much less volatile than the VXX

XXV

• Looks to replicate the performance of shorting the VXX