Volatility Derivatives Show Their Worth Today

I’m currently helping the Australian Securities Exchange educate institutions on volatility indexes.  One of the questions that came up was, “Why use a VIX related product to hedge an equity portfolio?”  Today is an example of why…

I awoke to see the S&P 500 down 1.38% on the day.  So how did some of the VIX related markets perform on a percentage basis?

  • June VIX Future up 5.82%
  • VIX Jun 20 Call up 48% – this is the call series in June with the highest open interest.
  • July VIX Future up 3.51%
  • VIX Jul 21 Call up 37% – this is the call series in July with the highest open interest.
  • iPath S&P 500 VIX Short Term Futures ETN (VXX) up 4.24%
  • VelocityShares Daily 2x VIX Short Term ETN (TVIX) up 7.37%

The answer is leverage.  On days like today when the S&P 500 is dropping like a stone, VIX related futures, options, and exchange traded products have their day in the sun.  Today was one of those days.

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Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…