anyone trading this yet... In related news, Barclays Bank PLC debuted the iPath S&P 500 VIX Short-Term Futures ETN (NYSE Arca: VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSE Arca: VXZ). Both VIX ETNs provide investors with exposure to one or more maturities of futures contracts on the CBOE Volatility Index which reflects the implied volatility of the S&P 500 Index at various points along the volatility forward curve. ETNs are debt instruments linked to the performance an index. ETNs, unlike ETFs, carry credit issuer risk similar to the risk of investing in individual bonds. VXX is designed to track the S&P 500 VIX Short-Term Futures Index TR which targets a constant weighted average future maturity of one month. In contrast, VXZ is designed to track the S&P 500 VIX Mid-Term Futures Index TR which targets a constant weighted average futures maturity of five months.
I think trading VXX could be interesting. The VIX has been a great indicator before tradable moves. It will be interesting to see how the correlation holds between VIX and VXX
Perhaps you should experiment with some other momentum measures, among which you may find even more leading indicators... But as for VXX - please note it is a VIX futures tracker. Yeah, a promissory note on a futures strip on an index of implied volatility of an options strip struck on an index of stocks (and I thought CDOs were complex. Claiming to track the VIX index itself would be a rampant case of mis-selling - gamma and vega without theta - an option trader's holy grail - it would be like buying free lottery tickets or straddles for credit. In fact, Barclays attempt to track mid-term volatility (5-month constant maturity), i.e. the VXZ has a vastly superior risk-to-reward ratio, so it beats hands down VXX as an investment proposal (and find me a trader who does not turn into an investor from time to time. 5-month vola is less affected by time decay, just like in case of long-term options, so VXZ would not bleed you to death in persistenly low vola periods such as 2004-2007, whereas VXX would surely do (think of those 30% losses a month on a 'VIX buying' strategy implemented with VBI futures when VIX was around 10). And to see what happens at the opposite extreme, i.e. to unfortunate 'VIX selling' attemps, where your losses are even more unfair and less intuitive than the good old time decay bleed (theta should in fact work in your favor when shorting gamma, but it does not here...), just read the Don Fishback's little crusade against these products on SeelingAlpha, e.g. this article: http://seekingalpha.com/article/116352-proposed-vix-etns-are-not-a-volatility-bet BTW, here is the 'missing link', that Barclays marketing people managed to 'omit' in their sales pitch (the red line will be your equity curve, not the blue one): http://www2.standardandpoors.com/spf/pdf/index/SP_500_VIX_Futures_Index_Series_Factsheet.pdf And as a little memento - ETN's ain't ETF's. LEH issued the former... and brought them down, with the rest of its unsecured debt. It is probably wise not to become a creditor of any bank at this point in time...
I heard, perfect synthetic VIX construction using SP500 options is possible. Does anybody know how to do this?