Question about buying into the VIX

I’m looking to get a stock portfolio going and would like to purchase some downside protection in the form of the VIX. Can I buy shares of the VIX or is it an options-only type of trade? If I can’t buy into the VIX, what’s the best, if any, ETF to replicate the VIX performance?

For future reference, give Google a shot for 5 minutes or check out seekingalpha before creating a new post. You can only buy options on the VIX- You’re looking for VXX, an ETN based on the VIX, however don’t expect it to be a perfect proxy.

You’re clearly not busy if you have time to check the back office section of a forum. Is it really an inconvenience to you that I’ve created a post asking for suggestions on good ETF/ETN to replicate the VIX?

VIX doesn’t have shares (it’s just an index calculated by S&P). However, there are a bunch of volatility-tracking ETFs and ETNs with varying methodologies: http://etfdb.com/2010/reviewing-all-the-vix-etf-options/ There are probably VIX futures also. I haven’t looked into them though. ETFs or ETNs are usually more convenient for retail investors anyway. Also, if this is a hedge for a stock portfolio, you should look into the tracking error with VIX with respect to equities. There is obviously a negative correlation between the two, but it’s far from perfect. Volatility also exhibits certain behavior that is not reflected in equities - like mean reversion and low reaction to rates. (In a 5% interest rate environment, for instance, equities will go up more, but VIX behavior will be pretty much the same).

If you’re able to trade in the Canadian markets, the ETF “HVU” (Horizon Beta Pro) is one such ETF that attempts to replicate twice the daily performance of the VIX. The ETF “HUV” attemps to replicate one times the daily performance of the VIX.

Btw, if you’re looking for downside protection, why not simply look at some puts on the specific stocks you’ve got in your portfolio. If you’ve got enough capital, it may be more profitable (more of a protection).

Puts can be expensive though.

True, and finding something to replicate the VIX is a round about, cheaper way of getting into Puts, but the VIX isn’t a sure fire protection as it isn’t perfectly negatively correlated with U.S. equities… there have been times especially around September where the VIX was rising along with the S&P… but I suppose these are the anomalies rather than the rule.

Thanks guys. I can’t trade options because I wasn’t approved for margin trading. I just graduated college so I don’t have enough money in my account/steady job to allow for approval. Any idea how long or what the requirements are for being approved for margin trading?

ohai Wrote: ------------------------------------------------------- > Puts can be expensive though. Short volatility. Whats up LTCM.

robber07 Wrote: ------------------------------------------------------- > Thanks guys. I can’t trade options because I > wasn’t approved for margin trading. I just > graduated college so I don’t have enough money in > my account/steady job to allow for approval. Any > idea how long or what the requirements are for > being approved for margin trading? Build credit history

ASSet_MANagement Wrote: ------------------------------------------------------- > ohai Wrote: > -------------------------------------------------- > ----- > > Puts can be expensive though. > > > Short volatility. Whats up LTCM. It’s been a good trade lately – realized vol is what, 10?

VXX is a pretty bad vehicle imo. The tracking error and cost of carry is very high. If you’re looking for downside protection your best bet is to simply use an inverse SP500 ETF (or simply short the SPY). If you’re looking to tie downside protection to the VIX you could come up with an allocation that shorts a larger % of SPY as VIX increases (i.e. If VIX is btwn 10-15 you are short X units of SPY, if VIX is btwn 15-20 you are short XX units of SPY).

Agree VXX is a poor hedge, just appeared by the way the question was proposed that he wasn’t aware of it. Inverse ETFs may be your best bet, but tracking error issues and lack of transparency have me skeptical…always seems like they’re underperforming their stated goal in both up and down markets and tend to erode slowly in sideways markets. Also don’t think delta hedging makes sense for a small account, even discount brokerages will eat away your returns.

Come to think of it, purchasing “protection” through an asset with symmetrical payoffs doesn’t make much sense in the first place. Basically, you would have one investment that is long equities, and then have another investment that is short equities, thereby cancelling out the equity returns from the first investment.

ohai Wrote: ------------------------------------------------------- > Come to think of it, purchasing “protection” > through an asset with symmetrical payoffs doesn’t > make much sense in the first place. Basically, you > would have one investment that is long equities, > and then have another investment that is short > equities, thereby cancelling out the equity > returns from the first investment. Might make sense in certain cases. Isn’t this what Equity Market Neutral Hedgefunds aim to do?

Well yeah, but I don’t think that is what this guy is trying to do.

Another alternative is to buy stocks that benefit from volatility. It won’t give you anything close to perfect negative correlation in the way that a put or shorting the index would, but it can act as a partial hedge on your portfolio. IG Group is a good company that benefits from volatility. It is a spread betting company and spread betting rises in volatile markets.