Monday screencast: complexity and volatility

abnormalreturns
November 29th, 2010

Complexity is oftentimes the enemy of investors and traders. Whether it relates to the methodology used or the vehicles traded it seems that the more simple the system, the better. That is maybe best exemplified in the world of leveraged ETFs and the entire VIX complex. The VIX complex has exploded with volume and host of new products. The net results for most users are questionable. This is due in large part to their complexity (and leverage). While used properly they can be a useful tool for some “sophisticated” traders. However for most the educational hurdles are probably not worth the effort. In today’s screencast we explore the use (and abuse) of complex financial products.

Items mentioned in the above screencast:

The bull market in VIX-related products. (WSJ)

Don’t take leveraged VIX products home for any period of time. (Daily Options Report)

Jared Woodard, “(T)he complexity of modern financial products clearly outstrips the ability of investors to understand them, even when they are relatively “sophisticated” and are presented with proper disclosures.” (Condor Options)

On the value of simplicity in trading. (Chicago Sean)

Daily chart of the iPath S&P 500 VIX Short-Term Futures ETN (VXX). (Finviz)

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