#Best newsletters volatility trading how to#

In all the excitement, it’s perhaps easy to forget that implied volatility is not the same as volatility and may behave differently. These impenetrable descriptions are the more problematic because ETNs are, of course, available to less sophisticated investors, possibly even to retail investors. “The Euro Stoxx 50 Volatility Short-Term Futures Total Return Index is based on the performance of VStoxx futures contracts, which could involve roll costs and exhibit different risk-and-return characteristics,” explains the website of iPath, the brand name for ETNs from Barclays Capital, highlighting a couple of the risks associated with this type of arrangement along the way. Instead they invest in futures contracts on those indices.

The new exchange-traded notes (ETNs) which have been launched on this index, as well as the two ETNs (one short-term and one mid-term) launched on the Chicago Board of Options Exchange (CBOE) Volatility index, the Vix, don’t invest directly in the indices they reference because that’s not possible. Witness Stoxx’s catchy description of what its new Euro Stoxx 50 Volatility Short-Term Futures Index (VStoxx) does: “The new index measures the performance of a hypothetical, rolling portfolio invested into constant maturity implied volatilities on the underlying Euro Stoxx 50 Index.”Įxcited? Well, that’s just the start. Investable volatility products can be complex. However, there are voices of caution in the market. “The investor can keep hold of the stock and hedge the risk with volatility,” he says. Joe Kohanik, vice president of fixed income and derivatives products at Linedata, gives the example of an investor who holds a stock that could be affected either very positively or very negatively by a forthcoming announcement. Spikes in the credit spreads often coincide with rising equity volatility.”Īs well as being a portfolio diversifier, volatility can protect against certain risks.

“You can find similar patters in the credit market. “Volatility has a strong negative correlation with equities and so it adds value as a portfolio diversifier,” says Antti Suhonen, head of origination, equity and funds structured markets at Barclays Capital.Īnd that negative correlation of equity volatility doesn’t just apply to the equity markets, according to Suhonen. The potential advantages of investing in volatility are easy to understand.

#Best newsletters volatility trading how to#

The question is: how to make use of this phenomenon in a portfolio? It’s a question that has become increasingly easy to answer as the range of investable volatility products has experienced exponential growth over the past two years. In other words, when equity market volatility is up – as it has been so often of late – equities themselves are down. “High volatility equals high uncertainty,” says Konrad Sippel, executive director and head of sell side at Stoxx, an index provider. Volatility is essentially a measure of fear in the market. But critics point to issues of complexity, definition and transparency, reports Fiona Rintoul Investable volatility products are gaining in popularity.