Friday, September 25, 2009

Investing For Volatility

The VIX, or the Chicago Board Options Exchange Volatility Index, measures the implied volatility of S&P 500 index options. It is commonly referred to as the fear index because a high value on the VIX implies that it is more costly to protect one’s portfolio. As one could guess the VIX soared to an all time high of 90 on October 24, 2008 near the height of panic. However, the index has steadily fallen from that peak to a reading just north of 25.

Recently, Barclays introduced an ETN (Exchange Traded Note) called iPath S&P 500 VIX Short-Term Futures and trades under the symbol VXX. As there is no way to directly invest the VIX, they have provided an investible vehicle that will hold VIX futures contracts that are continuously rolled forward. Many of the analysts we read are looking for short term correction here as the market catches its breath and we did some surface research to see if the VXX could provide us with a short term hedge. Although it does not seem like a good fit at the moment, we are pleasantly surprised with innovations in the investment world and will continue to scour the world for ways to enhance our portfolios for our clients.