Stock Option Investment Advice

VXX – Thanks for the Hedgeories

Oh, those pesky Volatility Indexes, ETFs, ETNs, 2X and 3X and inverses…maybe there are too many now. But, unfortunately, it is time to say ‘VXX – Thanks for the Hedgeories’

It appears Barclay’s is shutting down VXX – iPath S&P 500 VIX Short-Term Futures ETN – on January 29th, 2019.

VXZ – iPath S&P 500 VIX Mid-Term Futures ETN will also terminate.

What is an ETN?

An ETN is an Exchange Traded Note.  Unlike an ETF, if you hold shares in an ETN it is more like holding a bond.  An ETN is an unsecured debt note underwritten by an institution – in this case Barclay’s.

You can buy shares of an ETN, just like you can with an ETF.  But, the ETN is not invested into the asset it tracks.

There are pros and cons to each, but we will save that discussion for another blog.

Why Does the Shut Down of VXX Matter?

We share our approach to using Volatility Indexes, ETFs and ETNs as a portfolio and market hedge.  As the unexpected occurs, these volatility securities will swing up (quickly), or down as the market settles.

Using Calls on the VIX (Volatility Index), VXX, UVXY or other securities that monitor volatility can result in high returns to counter losses in your portfolio.  At times I found the options on VXX to be less expensive than the VIX, which made them more appealing in choppy markets.

VXX (and VXZ) have been good tools to use for this approach.  And since you can buy the underlying, unlike with VIX, you can also trade other strategies such as covered calls, collars, married puts and more.

Also, being able to purchase the underlying can work to help manage a Naked Put, Bull Put spread or other plays on VXX if it moves against you.

But, now we have one less volatility fund to use as a market hedge.

Or, Do We…?

Although VXX and VXZ are reaching termination at the end of this month, Barclay’s is replacing them with other ETNs:

VXXBiPath Series B S&P 500 VIX Short-Term Futures ETNs


VXZBiPath Series B S&P 500 VIX Mid-Term Futures ETNs

These two ETNs are already trading and options are available.  Right now they are tracking VXX and VXZ respectively, and will continue on when these two are terminated.

How Can ETNs Work as a Hedge?

As we mentioned, shares and options on the volatility ETFs and ETNs can be used to hedge your portfolio for the unexpected.  As market ‘bumps’ occur, or during weakness as with the last 3 months of 2018, standard volatility securities will spike up (where the inverses will spike down).  If you are positioned to capture the sudden moves in volatile markets, these gains can counter the unrealized losses in other strategies.

Here are links to a few of our resources on trading volatility securities as a portfolio hedge:

VIX Calls as a Market Hedge – a portion from our End of Year, Favorite Topics of 2018 presentation.  Click HERE to view.

Managing Bull Put Spreads, Open Interest, VIX Portfolio Hedge and more!  (VIX discussions begin at the 37 minute mark).  Click HERE to view.

Insuring Portfolio with Put Options or VIX Call Options – another blog article, oldie but goody!  Click HERE to read.

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