Learn the trade here. Make it on tradeMONSTER

Options Trading News

December 25, 2013  Wed 8:22 AM CT

VXX: SEE CHART GET CHAIN FIND STRATEGIES
Markets at new all-time highs into the holidays are a good thing, and having hedges in place certainly makes sense for the inevitable correction. But not all hedges are created equal.

Your hedge shouldn't be wrapped up with a bow and be a surprise when you open it. You should know exactly what you are getting.

So I was surprised when I saw an article this week about buying the iPath S&P 500 VIX Short-Term Futures Note (VXX) as a hedge without any explanation of what it actually is. Most of you already know this story, but if anyone hasn't, then it is worth the writing.

The VXX is a volatility hedge, which means that in theory it will rise when the market sells off sharply. And it can go up a lot, as a chart will show, but a longer-term look will also show a dismal performance. The exchange-traded note finished yesterday down 2.04 percent to $14.16, a new all-time closing low. But it started in February of 2009 at $6,400 (after two reverse splits).

Some talk mention it as a way to play the low levels of the CBOE Volatility Index, but the VXX  doesn't "own" the VIX. It does own the two nearest-month VIX futures, which are usually higher than the spot volatility index. If all that makes your head spin, you shouldn't own the VXX.

This isn't a bad time to buy some extra hedges as a gift to your portfolio. Just be sure that it doesn't come in a surprise package.
Share this article with your friends


Related Stories

VXX

VIX slips as equities finish mixed

October 17, 2014

Major equities indexes again rebounded off morning lows to finish mixed yesterday, leaving the CBOE Volatility Index down 4 percent.

Premium Services

Free Webinar Series

The 100K Challenge

Education & Strategy

Anatomy of a butterfly

One of the many esoterically named option strategies is known as a "butterfly." But don't be fooled: Like other advanced...

View more education articles »
optionMONSTER stockMONSTER tradeMONSTER