These are strong words, I know. I wouldn’t choose them if I weren’t truly concerned, because apparently not many care about the thousands of investors who have been burnt using volatility index (VIX) options and the VXX, a VIX-based ETF product, to invest in volatility.

Before I get into why these investments are completely wrong for the average investor, I need to offer balance to that statement and hopefully prevent many of my former colleagues at the CBOE from removing me from their Facebook friend list (or worse).

There is a place and a function for the VIX, VXX and the options that trade on both. To some extent, they are related to volatility and can be reactive and utilized in some form or fashion. Unfortunately, the behavior of both products even leaves me frustrated (and I have been trading options for 15 years).

What the Bold Print Giveth, the Fine Print Taketh Away

Last week, Robert Whaley, who created the VIX back in 1993, was on CNBC discussing his new Alpha indexes (I will examine those at a later date). Earlier that day he talked about the VIX and said it was an accurate “fear” indicator.

I disagree!

He is obviously a bright, talented mathematician and educator, but probably sees the world a bit differently than the average investor. He also has an intimate relationship with the products that he creates, which may indicate a lack of objectivity.

Aside from the fact that mathematical models can’t mimic real life and that theory and application are two very different things, I am more concerned with the opinion he offered in the interview and the lack of caution to investors in these types of complex products.

He joked that he made 30% yesterday (in his new product) and implied that trading regular “vanilla” options are more Read more