How Volatility ETFs Work

Read this before you trade Wall Street Connected Profit Like The Pros Brought to you by: Dear Reader, We have some BIG UPDATES for all you Wall Street Connected subscribers. [And you need to take action now to make sure you don't miss out!]( Our newsletter got a complete makeover. We overhauled the format and layout of the newsletter, making it easier to read and simpler to follow. And gave it a nifty new title - THE SPILL [But you won't receive this newsletter unless you sign up HERE.]( Because pretty soon, Wall Street Connected will disappear FOREVER! Proprietary Data Insights Financial Pros Top ETF Volatility Searches in Nov. Rank Name Symbol Searches #1 ProShares Ultra VIX Futures UVXY 125 #2 iPath VIX ETN VXX 87 #3 ProShares VIX Futures VIXY 83 #4 ProShares Short VIX Futures SVXY 7 #5 Invesco S&P 500 Low Vol. ETF SPLV 5 Sponsored [The Crypto Stash: Secret coins to buy now]( The crypto bull run no one's talking about Markets crypto could take over soon [Click Here To Learn More]( What we’re watching [Volatility Is Back Baby!]( Traders look to capitalise on price swings. [Watch Now]( Investing How Volatility ETFs Work Volatility is back baby! Traders and investors are looking to capitalize on the price swings. Volatility ETFs and ETNs have become popular ways to trade market fear. Heck, on Black Friday, two of the more popular ETFs, the VXX and UVXY jumped 27.3% and 37.44% respectively! That sounds almost too good to be true...because it is. In reality, most volatility ETFs LOSE value over time. We want to explain why. It’s easy to get sucked into the headline numbers, hoping to catch a piece of the action. And many newer traders and investors don’t understand the ins and outs of these products. So, we’re going to do a CliffsNotes overview to help you understand and navigate these tumultuous waters. What is volatility? We need to start by answering this basic question. Volatility is price movement. Increased volatility means increased price movement. Stock markets have an inverse relationship with volatility. - When markets drop, volatility increases. - When markets rise, volatility decreases. Why is that? When stocks drop really hard what’s likely to happen? They bounce back of course! That’s repeated time and again throughout history. Take a look at this weekly candlestick chart of the S&P 500. Each bar represents one week. At the bottom is a measure of the price range over the last 14 weeks (known as average true range). You don’t need a PHD in charts to see what’s going on here. When markets drop, the price range expands. When markets rise, the price range decreases. Measuring volatility The most common measure of volatility is known as the S&P 500 Volatility Index (AKA the VIX). People often refer to this as the fear gauge. The VIX measures demand for options on the S&P 500. Investors often buy options to protect their portfolios against market drops. This is how it works: - Markets drop - Investors buy S&P 500 options (puts specifically) to protect their portfolios - Demand for options rises - The VIX rises Shorthand: Just know that (the majority of the time) when markets drop, the VIX goes up. Volatility ETFs Now, there is one other thing you need to understand about the VIX before we move into the ETFs. You can’t directly trade the VIX. It’s an index, not an actual stock. Volatility ETFs track VIX futures (leveraged contracts), not the VIX itself. This is a key point that many people fail to understand. It explains why you can have the VIX down several percentage points on the day but the volatility ETFs up. So, let’s look at two of the most popular volatility ETFs. The first is the VXX. The VXX tracks (short-term) volatility futures without leverage. So, if VIX futures are up 1% on the day, the VXX will likely be up ~1%. The second is the UVXY. The UVXY tracks (short-term) volatility futures with leverage of 1.5x. So, if VIX futures are up 1% on the day, the UVXY will likely be up ~1.5%. Bad Long-Term Investments No investor should hold the VXX or the UVXY for any length of time. A month would be a stretch. Over time, all else being equal, both of these ETFs will lose value. It’s simply a function of the way VIX futures work. You see, futures contracts expire at regular intervals. So, to keep the investment going, you get rid of the expiring contract and buy the next one out. The majority of the time, the contract for the next month will be more expensive than the one you’re closing out. You can think of these futures contracts as bets on what the price of the VIX will be on the expiration dates. It’s a lot easier to guess on one day out than a month out. So, the one further out charges a premium because there’s more time for price to change. The Bottom Line: You can use volatility ETFs as hedges short-term. Otherwise, it’s best to avoid them entirely. Instead, keep a watchlist of stocks you want to buy and reserve some cash to snap them up when prices drop. [Make sure to sign up for The Spill to keep receiving our premier investment newsletter.]( # [submit to reddit]( [submit to reddit]( [submit to reddit]( To ensure delivery of all emails, [whitelist us](. Update your email preferences or unsubscribe [here](. View our privacy policy [here](#). Copyright ©2021 InvestingChannel. All rights reserved. 1325 Avenue of the Americas, Floor 27 & 28 New York, New York 10019 Disclaimer: This is not investment advice. This InvestingChannel, Inc. newsletter is for information purposes only and opinion-based. Futures, forex, stock, and options trading are not appropriate for all investors. There is a substantial risk of loss associated with trading these markets. Losses can and will occur. No system or methodology has ever been developed that can ensure returns or against losses. No representation or implication is being made that using any of these methodologies or systems will generate returns or ensure against losses. Investors should be cautious about any and all investments and are advised to conduct their own due diligence prior to making any investment decisions. [Link](