mpf313

I work in this space so here is my 2 cents. I think some of this has already been discussed, so sorry if I am being repetitive. Over long periods of time there are two factors that will determine your return in the VIX ETFs: contango and the volatility of volatility. Notably, the level of the VIX is not a (major) factor if you hold long enough. Generally the VIX futures are in contango, which gives inverse products like XIV positive roll yield, and products like VXX and UVXY negative roll yield. Also, because a -10% return followed by a +10% return does not get you back to even, these products suffer from the extreme volatility of the VIX futures. For a long XIV position to work out, you will need the positive roll yield to dig you out of the massive one day losses that can occur. An important note for those not familiar with VIX is that, since you cannot own spot VIX, there is no arbitrage to keep the contango between spot and the futures in check like there is in, for example, the oil market. Therefore, the spot VIX and future only need to meet on expiration - they can move independently until then. So VIX future exposure is not the same as spot VIX exposure. If you want to keep tabs on the VIX futures market vixcentral.com is a good resource. I've found that the best short-vol trade is simply to short UVXY during periods of contango. This trade is long the volatility of volatility and collects the roll yield during contango (~70% of the time). Short VXX is similar to short UVXY, but UVXY's 2x leverage accentuates the benefit of the volatility of volatility. However, it is highly susceptible to blowing up when the VIX futures shoot up. I don't (and won't) do it, but I know some funds that do. The guys at Horizon Kinetics/FRMO are perpetually short UVXY and simply hold substantial cash against it to cover potential margin issues. XIV benefits from positive roll yield but is hurt by the volatility of volatility. A short VXX position would be equivalent to a long XIV position only if you re-set your notional value of short VXX each day (i.e. realize losses when VXX goes up and add to your shorts when it goes down). For those that want to go long volatility, there is not a great way unless the VIX is in backwardation. My (anecdotal) experience would suggest that SPX puts or straddles might be the most cost effective. Long options allow you to define your risk, which you cannot do in the vol ETFs. One method that might be viable is to buy puts on the S&P Low Volatility ETFs (SPLV, USMV). Those ETFs has seen huge inflows this year, all of which are likely weak hands. If the market gains some downside momentum, investors are likely to flee from that ETF, producing higher than historical vol in the underlying stocks, which will make the Low Vol ETF experience high vol, and produce further panic selling. I have not looked at the option prices to see if they reflect this possibility, but they could be a good "value" versus SPX puts.