A Closer Look at the New Volatility Products On the Block

I'm cautiously optimistic that the new AccuShares Spot CBOE VIX Fund Up Shares (VXUP) and AccuShares Spot CBOE VIX Fund Down Shares (VXDN) will improve upon our current menu of tradable CBOE Volatility Index (VIX) products. Maybe it will even (gasp!) allow us to speculate on the actual VIX as opposed to some replication of VIX futures.

I asked for some opinions on Twitter and, well … not everyone shares my optimism. Here's a sampling:

@schaeffers @agwarner they will still trade just like the futures, expect with 4.5%/month roll (near average) regardless.

— Brian Clark (@troll1184) May 18, 2015

@agwarner @schaeffers yeah, expires at a future value that depends on VIX, which is mean reverting and fat tailed. (1/x)

— Brian Clark (@troll1184) May 18, 2015

@agwarner @schaeffers also doesn't factor in enough roll for the last 30 days, should be more like 7.5% instead of 4.5% (2/x)

— Brian Clark (@troll1184) May 18, 2015

@agwarner @schaeffers these will trade massive away from the indicative value because of these. (3/x)

— Brian Clark (@troll1184) May 18, 2015

That 4.5% is the daily roll of 0.15% x 30 days. It's designed to account for the mean reversion of VIX (always remember -- it's a statistic and not a stock). I don't dispute that different people studying the numbers can derive a different end result on the proper number to use and produce a number that's defensible. My guess is the disparity has to do with the fact that today's mean reversion can offset tomorrow's mean reversion and net to zero. Should that be additive, though? I'm not entirely sure, but that's why I suspect they reach different conclusions.

@agwarner @schaeffers 90% of VXUP and VXDN will be half math.

— Trading Volatility (@tradevolatility) May 18, 2015

I do 80% agree, but there's only a 40% chance he's right on this. OK, seriously, he has a very good write-up on the product here.

@agwarner The maximum gain in a month is capped at 90%. An embedded call option for VIX shorts?

— Jake (@EconomPic) May 19, 2015

That is true, as per the fact sheet. It's capped on the downside, too, though it's hard to imagine a scenario where it loses 90% of its value in a month. You do need this cap, however, given the 1:1 Creation/Redemption relationship between VXUP and VXDN. A lift of 100% or more would have a worse reaction than Independent George meeting Relationship George.

And finally, the big question. Is this just a VIX future in disguise?

@agwarner @stevenplace the only difference I see are the special distribution days which are something like an instant expiry.

— Alexander Aljechin (@aaljechin) May 19, 2015

The distributions accumulate for 30 days, and then at the end of that period they get paid out to the "winner." Does distribution day now become de facto expiration day of essentially a VIX future? It might. I'm going to reserve judgment on this until we see it trade for a bit. But if that's the case, we haven't accomplished much here.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.