When you see a bad deal in the stock market, there’s usually a way to take the other side of that trade and reap the rewards the other party gives up. With the markets stumbling this year and fear running high, many investors are looking for a way to profit from the anxiety. After all, it’s always nice to own something that spikes higher while other investments are falling.
The market’s most well-known “fear gauge” is the CBOE Volatility Index, a.k.a. the VIX. When fear hits the stock market, the VIX surges.
But because the VIX is an index, it’s not directly tradable.
There’s a way to trade the VIX in the futures market, but it has a big drawback. Futures contracts have expiration dates. The contracts with nearer expiration dates are usually cheaper.
That’s why rather than try to play the VIX directly, many investors turn to an exchange-traded note (ETN).
The popular iPath S&P 500 VIX Short-Term Futures ETN(NYSEARCA:VXX) can be used for short-term trades but will crush you over longer time frames.
I’ll explain…
To create the VXX, iPath constantly rolls VIX futures contracts forward. It must sell out of the contracts that are set to expire and then purchase next month’s futures contract.
They lose a bit of money with almost every roll. That effect, the result of something called “contango,” directly hits VXX.
Just look at the chart below, comparing the VIX to the VXX. It begins in the
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