Trading Volatility: At What Cost?
Robert E. Whaley
Vanderbilt University - Finance
May 6, 2013
Volatility trading is in vogue. Launched in January 2009, exchange-traded products (ETPs) linked to the CBOE Market Volatility Index (VIX) have enamored no small number of traders judging by the billions of dollars invested in these new products. Why exactly is unclear. The most popular VIX ETPs are not suitable buy-and-hold investments and are virtually guaranteed to lose money through time. Indeed, since product launch, ETPs linked to the S&P 500 VIX short-term futures indexes have chalked up losses of nearly $4 billion. Yet the market continues to grow. The purpose of this paper is to describe these products, explaining how and why they lose money.
Keywords: volatility trading, VIX ETPs, contango
JEL Classification: G10, G12, G13, G14
Date posted: May 7, 2013