Are your clients looking for ways to invest in this era of rampant volatility? If so, you could look at the iPath S&P 500 VIX Short-Term Futures Exchange-Traded Note (symbol: VXX) as the ultimate investment in volatility. Or, for the very aggressive trader, you could consider options on the VXX, which are now available with weekly expirations.

Traditional options expire on the Saturday following the third Friday of the expiration month. A new series of weekly options now begin trading each Thursday and expire on the Saturday following the Friday of the following week — the exception being the week when the monthly option series is set to expire.

At the time of writing, in early September, there were VXX options set to expire on Sept. 11 and Sept. 18. No new weekly options were initiated on Sept. 9 because the monthly option series already existed. But on Sept. 16, a new weekly options series expiring on Sept. 25 would have begun trading — and so on.

Another ETN for those who are challenged by the nuances of VXX is the iPath S&P 500 VIX Mid-Term Futures ETN (symbol: VXZ). Unlike VXX, VXZ focuses on mid-term volatility by tracking the performance of the mid-term futures contracts based on the Chicago Board Options Exchange’s volatility index (symbol: VIX) at various points along the volatility forward curve. Specifically, VXZ tracks the fourth, fifth, sixth and seventh month of VIX futures.

Generally, VXZ is 25%-40% as volatile as VXX — a fact reflected in VXZ option premiums when compared with the costs associated with VXX options.

Volatility contracts are all impacted by the daily rolling of the futures contracts. However, longer-term futures tend to be impacted less by day-to-day fluctuations in market sentiment and, as such, there is less of an impact from rolling the VXZ underlying futures contracts.

This means, from a trading standpoint, VXZ may be a better underlying ETN when employing options writing strategies such as covered calls and cash-secured puts.

Bear in mind that volatility ETNs are not eligible for margin. Effectively, you need to pay the full price if buying the underlying ETN; and, I suspect, you must have sufficient cash to meet any of the obligations associated with put writing.

Another point of clarification is the difference between exchange-traded funds and ETNs. One website, www.etf.about.com, contrasts the two as follows: “ETNs are structured investment products that are issued by a major bank or provider as senior debt notes. This differs from an ETF, which consists of an actual security or sometimes commodity or currency derivative, such as futures, forwards and options.”

The bottom line: when you buy an ETN, you are effectively buying a bond-type investment issued by a financial services institution, with repayment terms defined by the prospectus.

Another development in the ETN space is Barclay’s Bank PLC’s introduction of an inverse ETN that inversely tracks VIX short-term futures. Unlike VXX, this ETN (symbol: XXV) rises when volatility is declining and falls when volatility is rising.

XXV is subject to the same rolling effect as VXX, but the impact on XXV is reversed. For example, when rolling from the front month of VIX futures to the back (i.e., the second) month, markets are in “contango” — longer-term futures are trading at a higher price than shorter-term futures — which benefits XXV. But when the VIX futures are in “backwardation” — the second-month contract is trading at a lower price than the front (first) month — this has a negative impact on XXV.

When volatility is at the lower end of its trading range, VIX short-term futures tend to trade in contango, which means that the longer-term futures trade at a slightly higher value than the shorter-term futures. When volatility is at the higher end of its range, VIX short-term volatility futures tend to trade in backwardation.

XXV is not very useful as a portfolio hedge because it will tend to move in the same direction as U.S. equities. However, it is an interesting short-term trading vehicle that you might purchase after a short-term spike in volatility. The theory underpinning a “buy in reaction to an event” scenario is that volatility will not normally remain inordinately high for long periods. When volatility spikes, XXV will decline but, over time, should benefit from a gradual decline in volatility to more normalized levels.

As of early September, there were no listed options on XXV. But I expect options to be available soon, as demand ramps up. IE