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VIX futures contracts are held by ETF that are designed to track the VIX Volatility Index. Short-term futures contracts--generally the nearest two-months--are held by funds like VXX, XIV, and TVIX and tend to be more volatile. Medium term contracts--generally months 4-7--are held by funds like VXZ, ZIV, and TVIZ and are much more stable.

Volatility ETF Holdings & Rollover Gains/Losses

It is not a simple matter to translate the VIX index into an ETF product that investors can trade on the open market. VIX options trade as monthly contracts, meaning that every 30 days, the front-month contract will expire. A fund like the ETF VXX must therefore close out its contracts each month and roll them over into the next month's contract. Because uncertainty and fear generally increases the further out time you go, later contracts tend to be more expensive than near-term contracts. This phenomenon is known as Contango. The opposite situation, Backwardation, occurs when subsequent contracts trade at a discount to the front month contract. If the underlying option strip is trading in Contango, the fund effectively pays a premium each month to roll over its contracts. Over time, depending on the magnitude of the Contango, this eats away at the fund, regardless of the performance of the index that the ETF is designed to track. The table below uses data on ETF holdings and degree of contango/backwardation in the Futures market to calculate gains or losses due to rollover.

Leverage-Induced 2X ETF Decay The leveraged volatility ETFs--which include TVIX, TVIZ, and UVXY--are particularly dangerous trading vehicles. Not only do they suffer double the rollover losses (or profits, in the rare occasions that the Futures are in backwardation), but they also underperform against their 1x counterparts due to the mathematics behind the leveraging process itself. See this article for an in-depth explanation of this phenomenon. The chart and tables below calculates this decay over the past month.

Volatility Hybrid Score The Hybrid Score is a calculation to determine profitability of volatility ETFs. The score takes into account the two primary determinants of profitability of these ETFs: Mean Reversion and Contango. Mean Reversion is the principle that while volatility make spike or slump, there is a strong tendency for volatility to quickly return to a baseline with the VIX near 20. When VIX futures contracts rise significantly above this level, the odds increase that the VIX will drop over the longer term and when the VIX drops below 20 during tranquil periods, the odds favor a return to higher levels of volatility as investors become less complacent. Contango is the spread between futures contracts and results in rollover-associated losses to fund-holders (or profits to shortsellers). Higher Hybrid scores are associated with elevated levels of volatility and large Contangos and favor those investing in inverse ETFs or short volatility. Lower Hybrid Scores are associated with low volatility and small contangos or backwardation, all of which favor those betting on increased volatility. Using these scores, the historical performance of all volatility ETFs based on current hybrid scores is calculated to determine investing strategies.

Trading Strategies Market Commentary It's Time To Get Short Volatility September 28, 2014 After a week in which the S&P 500 shed 1.4%, it might come off as contrarian to recommend betting against the VIX-the volatility or "Fear Index"-at a time when uncertainty is at the forefront of investors' minds heading into the Fall. However, I have no interest in trying to game the VIX. Predicting precisely when the market is going to tank or when it is going to trade flat can be a costly, grueling process. However, rather than taking on a directional bet, an astute trader can capitalize on flaws in the difficult process of translating the VIX Index to tradeable volatility ETFs. This article discusses the mechanisms behind volatility ETF underperformance versus the VIX and highlights strategies to capitalize on flaws in these ETFs... [Read Complete Article] How To Trade Volatility When The Roof Caves In October 19, 2014 On September 28, I published an article entitled “It’s Time To Get Short Volatility” in which I laid down the principles of contango-induced rollover losses in the volatility ETF space and proposed some basic strategies to profit from these principles on the short side. At the time, the Dow Jones was sitting around 17,100, the S&P 500 at 1,980 and the VIX near 15. Fast forward two weeks and fears over a global growth slowdown, ebola, and earnings misses have stirred up a hornets nest in the volatility sector. The Dow is off 4%, SPY is down 5%, and the VIX is up over 45%. My proposed short position in VXX is in shambles, currently sitting on 25% loss. The Futures contango that has dominated the volatility futures throughout 2014 reverted last week to a rare backwardation, meaning that the rollover process is now hurting those betting against volatility. While I have little doubt that this trade will eventually become profitable once the VIX reverts back to the mean and contango reasserts itself, the surge in volatility served as a stark reminder of the need to minimize risk in this wildly unpredictable sector. This article serves as a follow-up to my earlier take on the subject, again emphasizing the principles of mean reversion and rollover losses to highlight a hedged strategy to effectively trade volatility whether the markets are tranquil or under fire. [Read Complete Article]

All volatility data, charts, and text are released by InVIXtus as experimental products. While they are intended to provide accurate, up-to-date data, they should not be used alone in making investment decisions, or decisions of any kind. InVIXtus does not make an express or implied warranty of any kind regarding the data information including, without limitation, any warranty of merchantability or fitness for a particular purpose or use.