Saturday, March 31, 2012

Beware Those VIX Plays

Beware Those VIX Plays

Good article in the WSJ this morning about the risk of some of the ETN VIX products, like the one that lost something like 60% this month.  These are not buy and hold products by any means but they can be powerful if used correctly.  Correctly means holding them for short term periods to hedge a portfolio of stocks or stock based ETFs or funds.  The three key components of making this strategy work are which VIX product to buy, how much of the VIX to hold, and when to buy and sell.

1.  Which VIX product to buy?  Stay away from the levered versions, the VIX is already very leveraged, getting 2x leverage on a leveraged product is a license for disaster.

2. How much to hold?  This is best done using a risk parity approach so that the risk of your VIX product is balanced with the risk of the rest of your portfolio.  The riskier your portfolio the more of the VIX you need.

3. When to buy and sell?  You need to use a tactical approach and you need to be nimble.  Trying to buy the VIX during a market uptrend is another license for disaster.

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