Rob Guttschow, Senior Portfolio Manager of First Trust Advisors, explains to DailyAlts.com publisher and editor Brian Haskin why he considers volatility to be its own asset class, in this video recorded at the Investing in Liquid Alternatives Conference in New York.
According to Mr. Guttschow, traders have been using volatility as its own asset class for years, even before there were specific volatility-targeting products. Standardized option contracts have been trading for decades, and this has allowed traders to simultaneously buy calls and puts on the same security – at the same strike price and expiration – to go “long volatility” with what’s known as a “straddle.” Taking the opposite side of that trade – a short straddle – positions traders “short volatility.”
The CBOE Volatility Index (VIX) is calculated on the basis of options prices on the S&P 500 Index. Mr. Guttschow points out there are now several VIX-related ETFs that are attractive to traders, but he warns that due to the rapid decay in the price of near term VIX futures contracts, they sometimes can cost as much as 10% per month to hold.
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