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With all the market volatility of late, I was thinking that it might be a good short term strategy to employ a straddle approach.

For those not familiar with Options trading: This is a strategy where you buy both a call and put option on a stock betting that it will move big (long straddle) in any direction, or stay stable (short straddle).

My question is this. Is there an investment vehicle (fund/ETF) where you can bet on volatility of the market without directly getting involved in the complexities of purchasing individual options contracts? Is it possible to even buy options on broad market index ETFs?

  • As for: "Is it possible to even buy options on broad market index ETFs?"...some ETFS allow this, others don't. for example SPY allows options – Victor123 Feb 11 '15 at 17:38
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I am not aware of a single instrument that encapsulates what you are after; but the components do exist.

At least in Canada, there are many Options traded on the Montreal Exchange that are based on Toronto ETFs. All the standard TSX ETFs are represented, as well as some of the more exotic. With a regular investment account approved for Options you should be able to do what you want.

In a parallel vein, there are also double down and up ETFs. One such example are the Horizons BetaPro series of ETFs. They are designed to return double the market up or down on a daily basis and reset daily. They do need to be watched closely, however.

Good Luck

  • 1
    Also note that most "double up" and "double down" funds are designed for use on kind of a day-trading basis - they reset their goals at the end of each day. If you're going to be holding on for a long time, your return will be significantly eroded. cf. Motley Fool: xrl.us/bhpif4 and Wall Street Journal: xrl.us/bhpif2 – fennec Jun 22 '10 at 3:53
  • The levered ETFs referenced here ("double up", "double down" are a really bad way to bet on volatility without a directional opinion). Your caution about daily moves is a good one, but if you're only holding them one day, they don't achieve the goal, as you need to know which direction you're betting on. And if you do hold them more than one day, you'll actually have the biggest problems in exactly the market that the OP predicts: If volatility is high, these will tend to do terribly- if the market is up and down OR down and up similar, large amounts, they lose money. – Jaydles Nov 19 '10 at 23:50
  • This is the accepted answer but does it answer the question of how to simulate a straddle strategy with an ETF? – Victor123 Feb 11 '15 at 17:40
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  1. Yes, there are options on both broad-based indices and on ETFs based on broad based indices. (For the S&P 500, SPX would be the index with options, and SPY would be one ETF that has them.)
  2. But the better answer to your question is probably to check out VXX, which is an ETN designed to deliver performance in line with short-term futures on the VIX. The VIX measures the implied volatility of the S&P 500, based on its option prices. Volatility is exactly what drives the value of a straddle, so this should be right in line with what you're looking for.*

*Volatility and the VIX can be very tricky to trade. In particular, going out longer than a month can result in highly surprising outcomes because the VIX is basically always a one month snapshot, even when the month is out in the future.

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Why bother with the ETF? Just trade the options -- at least you have the ability to know what you actually are doing.

The "exotic" ETFs the let you "double long" or short indexes aren't options contracts -- they are just collections of unregulated swaps with no transparency. Most of the short/double long ETFs also only attempt to track the security over the course of one day -- you are supposed to trade them daily.

Also, you have no guarantee that the ETFs will perform as desired -- even during the course of a single day. IMO, the simplicity of the ETF approach is deceiving.

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