JPMorgan to offer VIX-linked notes; products could serve as market hedge for investors, advisor says

By Kenneth Lim

Boston, Aug. 13 - New structured notes linked to the CBOE Volatility index could offer investors a way to hedge against movements in the equity markets, an investment advisor said.

JPMorgan Chase & Co. on Wednesday filed 424B2 documents with the Securities and Exchange Commission describing those notes.

JPMorgan said it may offer principal or partially principal protected notes linked to the CBOE Volatility Index.

The underlying index, also commonly referred to as the VIX index, is a measure of the 30-day expected market volatility of the U.S. stock market as implied by options on the S&P 500 index.

"I haven't seen a product linked to this yet," the investment advisor said. "They may have been one previously, but I haven't seen it. There are VIX options and futures on the VIX, and I suppose they might be similar."

VIX-linked notes offer hedge options

The VIX-linked notes will allow investors to possibly hedge against movements in the equity markets, the advisor said.

"You're basically taking a position on volatility," the advisor said. "Volatility is a measure of how much risk you're exposed to, so if you think volatility is going to go up, that means you think that there's going to be more uncertainty in the market. If you think that volatility is going to go down, it means you think the market's going to be calmer.

"I imagine you could use a product like this to hedge against broader market movements," the advisor said. "If you think the market's going to go down, you can buy this instead of buying a bearish product on the S&P [500], because volatility will go up when the market falls."

Product likely suits sophisticated investors

The advisor said the notes may be suitable more for sophisticated investors who are familiar with how options work.

"Think about it," the advisor said. "You're buying a product that's exposed to the volatility of volatility. Your risk isn't simply the risk of the market, it's the risk of the risk of the market. I'm not sure a lot of retail investors will understand it enough to be a big part of the market for this. But I think there will be interest from high net worth investors, maybe some RIAs [registered investment advisors], institutions."

How the notes will eventually be used in portfolios will depend on the specific terms of the notes, the advisor said.

"It really depends," the advisor said. "Even if the idea of using it to hedge sounds good, it really depends on how they price it...whether or not it's going to work as a hedge."

In general, the advisor gave the product a thumbs-up for innovation.

"I think it's interesting," the advisor said. "The VIX is an index that a lot of people are familiar with, it looks like not many people, if any, are linking to it, so I think it speaks well for the industry that they're constantly trying to come up with new products. I would say the challenge with any new product is educating the investors."

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