Schaeffer's Outside the Box Blog
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Let me paraphrase a conversation I heard on Bloomberg TV Wednesday morning:

Host: Are you buying the VIX here?
Guest: Oh yes. The long-term average is 20. It was as high as 80 in recent years. You have to own it here.

My reaction? It's discourse like this that highlights the uphill battle we face trying to get investors and traders to actually understand the CBOE Market Volatility Index (VIX), volatility in general, and tradable volatility specifically.

If the following sounds basic, apologies. I’ll bury an NFL teaser pick at the end.

As a fund manager, the guest surely (hopefully) knows you can’t actually "buy" the VIX. The VIX is a statistic that proxies the implied volatility of an S&P 500 Index (SPX) at-the-money option with 30 days remaining until expiration. You can buy something with the symbol "VIX," but it's a VIX future. The VIX future cash-settles on the day the future expires, so if "buying the VIX" means buying a VIX future, you have made a bet on where VIX, a statistic, will close on a day at some point in the future.

The guest can buy the September VIX future for near parity. Of course, that only lets the guest "own" the VIX until next Wednesday’s opening settlement price. You're not going to protect much of a portfolio that way. Not to mention the fact that thanks to Thursday’s market pop, September VIX is down about 10% in a little over a day. The guest can get a little more time and buy a November VIX future, but that trades at a significant premium (about $4 over VIX, as I type). Or, the guest can really get some time and buy a February VIX future, but that goes for about $23.

So, "buying" the VIX in futures results in actually buying the VIX nowhere near the VIX you see on the screen.

The guest can buy an exchange-traded note (ETN) that sounds like it proxies VIX. That, of course, is the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX). I really, sincerely hope that’s not the avenue of choice for anyone wanting to buy VIX for anything but a very short-term play. I won’t bore you with the 8,000th explanation of how VXX has to perpetually roll out in time into an upward-sloping VIX futures curve. I’ll just note that VXX is down 97.5% since inception 3.5 years ago, so anyone ever "buying" the VIX in this fashion got drilled.

The best way to actually "buy" the VIX involves buying actual SPX or SPDR S&P 500 ETF Trust (NYSEARCA:SPY) put options at the "cheap" volatility the current VIX proxies. This lets you lock in portfolio protection at what the entire world considers a bargain price. Options themselves have other variables, such as the price of the underlying and the dwindling time that remains until expiration. But if your goal in "buying" the VIX is protection, it's likely the best path.

Of course, that trade wouldn’t have done well in the past couple of days, either. Such is the nature of trying to time a top, a totally separate topic.

This is relatively basic stuff. Do the folks on TV not actually know this about VIX? Or, if a guest says they "bought" VIX at 16, and then comes back on in five months and the VIX is at 19, do the TV hosts find it easier to pretend they actually made a call that made some money? I have no idea. If anything, that trade lost money; a five-month VIX future goes for 23 now. All we can do here is help educate.

Oh, and football picks… A two-team teaser lets you move two lines 6 points each; the trick is that you have to win both. I’ll go with the Bengals -1 vs. the Browns, and the Texans -1 vs. the Jags.

Disclaimer: The views represented on this blog are those of the individual author's only, and do not necessarily represent the views of Schaeffer's Investment Research.


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