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In investing, conventional wisdom is often something to avoid. But it’s hard to argue with the consensus view that this bull market, having raced along for almost nine years now, is going to slow down—and soon.
 
Analysts of all stripes are anticipating a 10% correction. Those watching fundamentals have noted stock prices are so high that last quarter’s strong earnings growth helped only the companies that beat expectations by a wide margin, and they expect higher hurdles for the next quarter. Technical analysts, who watch for trends in stock-price movements, are getting wary, too. Three weeks ago, 65% of stocks in the Standard & Poor’s 500 index had positive momentum; now, only 35% do, says Fundstrat Global Advisors’ Robert Sluymer. “There is an internal decay taking hold,” he says, referring to the slowing upward momentum of many stocks in the S&P 500. He expects a 10% or greater correction this fall.
 
Now, 10% isn’t exactly the end of the world; it essentially means the S&P 500 index ends up around where it was at the beginning of 2017. For the average investor, the high likelihood of a relatively small correction isn’t reason enough to go to great lengths to protect their portfolios—yet many still are.
 
Volatility exchange-traded products (some are notes rather than funds) look enticing on a day like Aug. 10, when tensions with North Korea ratcheted up to “fire and fury” levels, and the CBOE Volatility Index, known as the VIX, spiked 40% to above 16, or even last week’s terror attack in Barcelona, when the VIX reached similar levels. 

These ETPs can be used either to protect your portfolio from volatility, or to capitalize on it. But they shouldn’t be used for longer than a few days, because of time decay—essentially, as time goes on, the value of the assets in the ETP, always futures contracts, declines. Between that and the internal cost of managing a futures portfolio, investors should be careful they aren’t paying more for protection than needed.

Popular VIX products, such as the $1 billion iPath S&P 500 VIX Short-Term Futures (ticker: VXX), which tracks VIX futures a month out, buys more expensive, longer-dated contracts and sells cheaper, shorter ones as they expire, effectively buying high and selling low. “They introduce a degree of cost that is explicit,” says Doug Kramer, head of Neuberger Berman’s options team. He estimates these ETPs have a drag of 5% to 6% a month, or about 60% a year.

Plus, “the longer the time horizon, the higher the premium,” Kramer adds. A 12-month at-the-money put—when the option’s strike price matches the price of the underlying security—on the S&P costs 5.9%. A one-month put 3% out of the money—when the option’s strike price is lower than the price of the underlying security—costs 0.6%. “Options require very precise market decisions. It’s technically possible to get a call option right, but it’s a bit like a lottery ticket,” says Kramer. That goes for professionals, as well.

An options trader known as “50 Cent,” who earned the moniker for his penchant for routinely hedging with large swaths of VIX options priced at a half-dollar, made a $21 million paper gain, based on one estimate, when the VIX spiked two weeks ago. However, the same trader probably lost some $150 million for the year through Aug. 11 and spent more than $170 million on VIX call premiums, according to Macro Risk Advisors. That’s why it’s usually the options seller, not the buyer, who ends up raking in the profits.