So, piecing it together from the beginning, I have the following:
The S&P 500 Index moves up and down with prices of the shares underlying the index —>
Investors buy put and call options on the S&P 500 —>
These options provide an implied volatility of the S&P index (i.e. the VIX) —>
Futures traders speculate on the future price of the VIX —>
These futures trades are compiled in an index, lovingly titled, “The S&P 500 VIX Short-Term Futures Total Return Index” —>
The ETF I purchase, the VXX, tracks the return of this VIX Futures Index.
So, in a nutshell, I’m buying an ETF of an Index of Futures intended to track the future direction of the VIX which loosely tracks an index of near term implied volatility derived from put and call options tied to the S&P 500 index. WTF?
No wonder brokers have hands on their faces.
But wait, there’s more… which I’ll explain in a subsequent post