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Volatility ETP

An exchange-traded product holding volatility futures, giving equity-account access to volatility exposure along with the roll cost of the underlying curve.

These products do not track the volatility index. They hold a rolling position in volatility-futures, typically blending the front two months to maintain a constant 30-day maturity, which means they inherit contango and lose value steadily in calm markets.

They are designed as short-horizon tools and used as long-horizon ones, which is why long volatility ETPs have some of the worst multi-year charts in existence and have needed repeated reverse splits. Inverse and leveraged versions add daily-rebalancing path dependence on top of that.

Example: the volatility index is flat over a quarter, but the futures curve is in contango the whole time. A long volatility ETP holding rolling front-month exposure loses roughly 5% to 10% a month to the roll alone, and finishes the quarter down sharply with the index unchanged.

Related: etp-roll-decay, volatility-futures, vix-roll-yield, volmageddon

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

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