Wednesday, May 13, 2009

The Debts of the Spenders: Vix ETNs and Leveraged Decay

I do not understand why any investors would ever get involved w/these things.

VXX and VXZ are 2 ETNs that are based on the VIX (the CBOE volatility index). Why buy the ETN when you can already trade options on the vix itself through the CBOE?

However, swing traders may love this vehicle. I have included charts that show Bollinger bands and ATR (Avg true range) to reflect just how dramatic the decay can be.

Just keep in mind 2 things:

1) It's a levered vehicle (itself a risky thing) built on modeling risk itself! That's 2x as risky. Both history and the math show that there are juicy opportunities to take advantage of the inherent decay.

2) It's an ETN. Which means filling out a K1 for tax purposes. Ugghhh. K1 compliance is enough to give me a blinding headache. Not even my accountant loves them. Which is strange when you consider how much extra he charged for my (brief) foray into trading other types of ETNs (I now trade ETNs through options which avoids most of that problem).

Of course there is no such problem if you are trading in some kind of tax shielded vehicle . . . like an IRA for ex (b/c there is no basis).


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