Bill Luby on VIX-Related Exchange-Traded Products

Bill Luby, who writes at the VIX and More blog and Expiring Monthly: The Options Traders Journal, is one of the most respected voices on all things related to the CBOE S&P 500 Volatility Index, also known as the VIX. We highly recommend anyone interested in the VIX and volatility-related derivates check out his blog, which has a variety of useful analysis and commentary.

Recently there has been a lot of coverage related to TVIX and otherexchange-traded products linked to the VIX. Here at SLCG, VIX exchange-traded products area continuing research effort, as these products are highly complex yet often sold to unsophisticated investors. Mr. Luby was interviewed by Bloomberg Structured Notes Briefs in the April 12 edition (ungated version not available for link) and had a lot to say about this issue:

I get a lot of basic questions about VXXor VIX options. Generally, someone buyssomething and the next day the VIX goesup 10 percent and VXX goes up 1 percentor they have VIX options and they'reunchanged. Then they'll come to me andsay, 'How come I'm not making money ifthe VIX is up 10 percent?' They have noidea that these products are based on VIXfutures; they are not familiar with conceptslike roll yield, term structure, contango,etc. A lot of people don't realize you can'ttrade the VIX directly.

They obviously didn't read the prospectussaying the 'long-term value ofyour ETN will be zero.' I even get hedgefunds or people who discreetly don't wantme to know they're hedge funds lookingfor background on VIX, 'What does termstructure mean?'

There is a level of basic ignorance startingwith the retail investor, including advisers,less so now, but definitely in the past,including the hedge fund community aswell.

He also suggests that some suitability requirements may be in order:

The knowledge required to trade themeffectively is comparable to the knowledgerequired to trade options or futures. I couldsee some sort of requirement being clearedfor a minimum balance or experience. This TVIX thing has been a boon forinvestors' education. It's been an expensiveeducation.

As for his readers' trading positions?

I would guess most of the people who read my blog are short the VIX exchange-traded product in a big way.