Familiar with the VIX?

[gcgang]

I let a guy from a wirehouse take a look at my stuff. While I've got kind of a mish mash of individual equities and a few funds, I mentioned the Warren Buffett quote about putting it all in index funds for my heirs.

He replied,

"The only thing I would add is for you, and the girls with the Buffet idea, put a 5% Mid-Term VIX Index on (permanent) and another 5% VIX Index on (timed) when market down drafts occur. This will moderate high equity bias. This collar is cheaper than options, but needs rebalanced weekly, when put on."

I understand the VIX measures expected volatility, but I don't fully understand how investing in it works. Can you just establish a long position in an ETN with the intention to sell at a gain, short term I assume, if the VIX goes up when the market goes down, as it has historically?

Not that I'd do this. I understand the guy is throwing out jargon to impress/ confuse me. And I also understand this is market timing disguised as hedging/ portfolio insurance. But still, I'm interested in ways of reducing my risk and was looking to this experienced forum to better understand. Thanks in advance for your help.

 

[brewer12345]

Run. Fast.

 

[braumeister]

Did he give you any other reasons, or explain how his idea would actually work?

This will moderate high equity bias.

I'm pretty sure there are simpler ways to "moderate high equity bias."

 

[MRG]

Run. Fast.

+1
If you got a rock or road apples, throw them at him. But keep running.
MRG

 

[imoldernu]

4 Ways To Trade The VIX (VXX, VXZ, TVIX, XXV, XIV, SPY)

Then there's the Mega Lottery.... my thinking?... Power ball number 26.

 

[tdv2]

This smells like just another investment timing exercise......bad move.

 

[ERD50]

...

I understand the VIX measures expected volatility,

... I understand the guy is throwing out jargon to impress/ confuse me. ...

I think you understand all you need to understand.

Sure, you can trade the VIX, but I can't see how trading it would correlate in any way to anything else. Expected volatility can go up or down during up or down markets. Has nothing to do with direction.

I suppose technically, you could ... ahhh, never mind, it sounds silly as I type it.

Go with your gut.

-ERD50

 

[FIRE'd@51]

I have had considerable experience trading these products (VXX, XIV, VXX options, and VIX options), although my interest has primarily been to attempt to capture the large contango usually present in the front two VIX futures contracts by going long XIV (which is easier and safer than shorting VXX). This has been very profitable as a buy and hold strategy, but is subject to large drawdowns when the VIX spikes, so it's definately not a hedge for the market.

I can't comment on the strategy your acquaintance is suggesting without knowing more details, but I would be interested in hearing what specific trades he is actually suggesting you do.