Investing Advice: Can New Volatility Products be Trusted?

Posted On December 22, 2017 11:59 am

I recently discussed how historically low volatility has limited the trading opportunities in individual options, but that hasn’t prevented people from trading the products tied to the volatility itself. Today’s investing advice will take a closer look at some of these products.

The dominant volatility gauge is the VIX, which was launched and controlled by the Chicago Board of Options Exchange (CBOE), and has spawned connected and similar measures for everything from Gold to Apple (AAPL) 

Volume in VIX futures and related ETFs such as the iPath S&P 500 Short Term Volatility (VXX) and their options remains robust, and one of the few bright spots for the CBOE that has otherwise seen dwindling trading volume.

Even as VIX hits fresh lows, shorting volatility has actually become one of the most popular and crowded trades.

Now, as the Wall Street Journal reports, the Nasdaq (NDAQ) wants to get in on the action by launching its own S&P 500 based volatility index to be called the VolDex. The main difference is that VolDex will be based on SPDR (SPY) ETF options rather the S&P 500 futures options.

The reasoning is the SPY options are more liquid, and will therefore be both more accurate and less open to price manipulation, especially as expiration dates approach.

But the bigger and better news is that Nasdaq may finally be launching a tradeable product based on the tech-heavy Nasdaq 100 Volatility Index (VXN).

The VXN was also created by the CBOE, but due to licensing issues, they have never launched futures or ETFs that could actually be traded.

It would be a very welcome development if the Nasdaq created and listed products, including options, based on the popular Exchange Traded Fund (ETF) PowerShares Nasdaq 100 (QQQ).

Maybe, in a “build it and the will come” scenario, once they list the new volatility products, the actual volatility levels will increase. Our investing advice is to keep a close eye on these products, and make sure they deliver on their promise before committing your money.

 Related: Was 2017 the Year of Buy and Hold? Learn More Here. 


About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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