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What Is the VXX?

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Okay, here's a question. A lot of people who trade stocks talk about the VXX. With two XXs it automatically has a cool symbol. But what in the hell is it? We are here to help!

The VXX Exchange-Traded Note

First, the VXX Index has a proper name, and that name is the iPath S&P 500 VIX Short-Term Futures ETN, or exchange-traded note.

According to the Bloomberg professional services description, the VXX ETN is designed to provide investors with a cash payment at the schedule maturity or early redemption based on the performance of the underlying index. Thanks! Let's back up just a second and look at what exactly "the underlying index is."

The VXX is designed to track the VIX Index. That raises an important question: What is the VIX?

The VIX Index is a measure of the implied volatility of S&P 500 Index Option. LOL! No, seriously, it is. Which, obviously, raises yet another question: What does implied volatility mean?

In finance, option contracts have what is called implied volatility. Many times, this volatility is more useful in measuring the value of an option than its price. Why? Because an option's price is only somewhat dependent on the price of the underlying security, that which it tracks, the implied volatility is an important factor in valuing the option. Remember, an option is simply a contract. But that contract has value related both to the price of the security it is contracted against as well as other factors such as the overall volatility of the market and the time remaining before the contract expires.

Anyway, where were we? Ah yes. The VIX, since it tracks the implied volatility of S&P 500 Index Options, gives us a snapshot picture of what the market's expectations of volatility are over the next 30-day period.

The VXX Bottom Line:
Well, the bottom line is simply this. The VXX allows you to speculate on the direction of the VIX Index. If you think the present snapshot of 30-day volatility is too low, the VXX is one method to speculate on the direction of volatility. Is it a good measure? Well, that's an answer for another day.
POSITION:  No positions in stocks mentioned.
TICKERS:  NYSE:SPY, NASDAQ:VXX   

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