Article by: Howard Simmons
Published by: TheStreet
Date: 13 Jun 2006
“I love volatility in all its manifestations, yes I do. In practice, it reminds traders that this is a risky business, and it has a way of transferring positions from the tourists and various weak hands in the market to those long-term investors we are supposed to admire. In theory, I use it in all sorts of analytic and modeling applications. If loving the VIX is wrong, I don’t want to be right.
“But having a well-designed and useful instrument is one thing; having a good trading tool is something else indeed. The significant problems associated with futures on the VIX were apparent months before their actual launch in March 2004; these were discussed in September 2003. Now that the Chicago Board Options Exchange has launched options on the VIX — options on futures on an index of the two-month strike-weighted volatility of an index of common stocks, each of which represents the discounted stream of future dividends; who needs reality? — and the VIX futures have gained some real trading traction, let’s see how they operate in practice.”
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