NEW YORK (TheStreet) -- First Trust CBOE S&P 500 VIX Tail Hedge Fund (VIXH) began trading Thursday. The underlying CBOE VIX Tail Hedge Index is based on the S&P 500 and an amount of one-month call options on the CBOE Volatility Index (VIX) ranging from 0% to 1% of the portfolio. The exact amount is determined by the level of forward volatility.
"Black swan" events are defined to be those that are both a surprise and have a major impact.
In statistical terms, they are often referred to as 3-sigma (three standard deviations) events, and more recently the term "tail risk" has been used in financial circles.
VIXH's objective is to hedge away the tail risk of equity exposure. According to the VIXH overview page, on the day of the monthly expiration of VIX options, previously purchased VIX calls are cash-settled and new VIX calls are purchased by the index at the 10:00 a.m. Central Time asking price. The percentage of money allocated to VIX calls depends on the level of forward volatility of the S&P 500 at the next call expiration as measured by the opening price of VIX futures with the same expiration as the calls as follows:
VIX futures less than or equal to 15, no VIX calls are purchased
VIX futures above 15 and less than or equal to 30, 1% of portfolio in VIX calls
VIX futures above 30 and less than or equal to 50, 0.50% of portfolio in VIX calls
VIX futures above 50, no VIX calls are purchased
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