Trading Volatility: At What Cost?

Abstract

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. The reason is unclear. The most popular VIX ETPs are not suitable buy-and-hold investments and are virtually guaranteed to lose money over time. Indeed, since product launch, ETPs linked to the S&P 500 VIX short-term futures indices have chalked up losses of nearly $4 billion. Yet the market continues to grow. This article describes these products, explaining how and why they lose money.