XIV; a New Start

Len Yates – President and Founder OptionVue Systems International Len Yates is a professional programmer with over thirty years of experience in optio...
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Len Yates – President and Founder OptionVue Systems International Len Yates is a professional programmer with over thirty years of experience in options software development. Since founding OptionVue he has earned worldwide recognition for his groundbreaking work in options analysis software, education and data services.

Trading the VXX/XIV; a New Start

Disclaimer Educational materials are provided by OptionVue Systems International (OSI) for informational and educational purposes only and are not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.

Options involve risk and are not suitable for all investors. In addition, electronic trading poses unique risk to investors. System response and access times may vary due to market conditions, system performance and other factors. You should thoroughly research and understand any security before investing in it. OptionVue provides neither investment nor tax advice.

The VXX Trading System

Actual Performance using the system so far

+102%

Actual Performance using the system so far 2.2 years

Actual Performance using the system so far 1.8 years

Actual Performance using the system so far 4.0 years

+102%

New 3 State System When the indicator is Above X

Be Long the XIV

(otherwise)

Be in cash

Below Y

Be Long the VXX

New Parameters When the $VXDIF(15) is Above +1.20

Be Long the XIV

+1.20

(otherwise)

Be in cash

0.00 Below Zero

Be Long the VXX

System Revisions • New Indicator • New Parameters

New Indicator YVI (Yates VXX Indicator) = $VXDIF(15) + ?

New Parameters When the YVI is Above +0.83

Be Long the XIV

+0.83

(otherwise)

Be in cash

- 0.60 Below - 0.60

Be Long the VXX

Previously… When $VXDIF(15) is Above zero

Be Long the XIV

Below zero

Be Long the VXX

Performance of new system as compared to the old 134x New System Old System

VX futures in a regular term structure

19.33

18.46 VX June

VX July

19.69 VX Aug

20.23 VX Sep

16.48 VX May

(Prices on Apr 21, 2016)

VX futures were introduced in 2004

VX futures in a backward term structure

25.97 VX Sep

23.88 VX Oct

23.25 VX Nov

22.75 VX Dec

(Prices on Sept 2, 2015)

20.63 VX Jan

What is the VXX? ETN (exchange traded note) representing a standard 30-day VIX futures price.

Contract

Price

Days Remaining

VX Jan

15.90

1

VX Feb

16.90

30

VX Mar

18.15

62

VX Apr

19.40

94

What is the VXX? ETN (exchange traded note) representing a standard 30-day VIX futures price.

Contract

Price

Days Remaining

VX Jan

15.90

14

VX Feb

16.90

46

VX Mar

18.15

72

VX Apr

19.40

104

What is the VXX? VXX holds proportionate amounts of the 1st and 2nd VX futures contracts. Example:

Contract

Price

Days Remaining

Holding

VX Jan

15.90

14

50%

VX Feb

16.90

46

50%

VX Mar

18.15

72

VX Apr

19.40

104

Next Day Each day the VXX fund must sell some of its holdings in the nearby futures contract and buy more of the 2nd VIX futures contract. This is called “rolling”.

Contract

Price

Days Remaining

Holding

VX Jan

15.90

13

47%

VX Feb

16.90

45

53%

VX Mar

18.15

71

VX Apr

19.40

103

Roll Yield When a normal term structure exists, the roll yield is negative as the fund must buy futures at a higher price (the 2nd contracts) than the ones it is selling (the nearby). Normal term structure Contract

Price

Days Remaining

Holding

VX Jan

15.90 (selling)

13

47%

VX Feb

16.90 (buying)

45

53%

VX Mar

18.15

71

VX Apr

19.40

103

Roll Yield When a backward term structure exists, the roll yield is positive as the fund may sell futures at a higher price (the nearby contracts) than the ones it is buying (the 2nd month contracts). Backward term structure Contract

Price

Days Remaining

Holding

VX Jan

41.60 (selling)

13

47%

VX Feb

34.90 (buying)

45

53%

VX Mar

29.35

71

VX Apr

27.44

103

Inverse Product XIV = an ETN that moves inversely to the VXX in percentage terms VXX

15.98

-0.26

-1.6%

XIV

27.78

+0.44

+1.6%

Trading System Proprietary indicator uses the $VXDIF = Price of 2nd VX future - Price of nearby VX future

We use a 15 day moving average of the $VXDIF

When $VXDIF is positive Roll yield is working in favor of the XIV and against the VXX

When $VXDIF is negative Roll yield is working in favor of the VXX and against the XIV

Effect of Volatility Changes Increasing Volatility  VXX Rises

Decreasing Volatility  VXX Falls

The Two Forces Affecting VXX Price 1. Changing Volatility Levels (Immediate, impactful)

2.

Roll Yield (Subtle, slow, steady)

Warning: The VXX and XIV are volatile Be prepared for some volatility Example, after our clients originally bought in at around 10.7, the XIV dipped down to 8.1 just 5 weeks later. (It recovered fairly quickly after that.) Still, the use of stops is not recommended. We do not recommend that all of your investment capital be used in the VXX Trading System, but only a portion

Warning: The Daily Adjustment Factor When volatility jumps up, and then goes back down, this hurts the inverse products such as the XIV. All volatility products move on a daily percentage basis. Let’s say volatility goes up 10.0% one day, and the next day returns to its previous level. That would be a 9.09% drop. VX Futures

VXX

XIV 100 98.2

+10% 100

-9.09% +10%

-9.09% -10% 90

+9.09%

Warning: The Daily Adjustment Factor When volatility jumps up, and then goes back down, this hurts the inverse products such as the XIV. All volatility products move on a daily percentage basis. Let’s say volatility goes up 10.0% one day, and the next day returns to its previous level. That would be a 9.09% drop. VX Futures

VXX

XIV 100 98.2

+10%

-9.09% +10%

-9.09% -10% 90

100

Weekly roll yield > +0.5%

+9.09%

Warning: The Daily Adjustment Factor When volatility jumps up, and then goes back down, this hurts the inverse products such as the XIV. All volatility products move on a daily percentage basis. Let’s say volatility goes up 10.0% one day, and the next day returns to its previous level. That would be a 9.09% drop. VX Futures

VXX

XIV 100 98.2

+10%

-9.09% +10%

-9.09% -10%

+9.09%

90

100

Weekly roll yield > +0.5%

$VXDIF > +0.5

How aggressive do you want to be? 1. Segregate some funds for this purpose. 2. Decide how aggressive you want to be in this account, and abide by your decision. A) Will you ever utilize all your cash? (Go all in?) B) Will you ever go beyond that and use margin? C) Will you use the leveraged products? D) Will you ever use options? (The VXX has options)

Short the VXX or long the XIV? Three drawbacks to shorting the VXX: 1. You must manage the position, selling more shares from time to time.

2. Right after selling more shares, the market might move against you, triggering a margin call. 3. The ultimate risk with any short position: You could lose more capital than just what is in your account.

What could go wrong? If it is normal times and you are short the VXX or long the XIV, a sudden catastrophe would cause the market to move against your position, and you may need to act quickly to close your position, possibly at a loss.

Volatility Products VXX = an iPath ETN from Barclays

XIV = VelocityShares ETN from Credit Suisse

VIXY = ProShares ETF that moves like the VXX

SVXY = ProShares ETF that moves like the XIV

Volatility Products VXX = an iPath ETN from Barclays (simple tax accounting) XIV = VelocityShares ETN from Credit Suisse (simple tax accounting) VIXY = ProShares ETF that moves like the VXX (complicated tax accounting) SVXY = ProShares ETF that moves like the XIV (complicated tax accounting

Results of VXX Trades Only 2 positive trades out of 5, but positive results overall. Long/Short

Enter Enter Price Date

Exit Date

Exit Price

Days Percent Held Gain/Loss

Long VXX

08/05/11

505.17

11/18/11

781.50

103

+55%

Long VXX

10/14/14

38.93

10/23/14

33.58

61

-14%

Long VXX

12/18/14

30.22

12/19/14

29.90

1

-1%

Long VXX

08/24/15

24.36

10/08/15

21.28

44

-13%

Long VXX

01/08/16

24.81

02/18/16

26.08

38

+5%

The LVI Lentz Volatility Indicator (LVI) is an indicator that shows whether volatility, as measured by actual price movements in the $SPX index, is increasing or decreasing.

Volatility increasing

Volatility decreasing

VXX Trading Tools Available in the OptionVue Software $VXDIF Difference between the two nearest term VX futures $VX30 30-Day forward price of the VX futures $VXXFV, $XIVFV, $SVXYFV, and $VIXYFV Fair values of the VXX, XIV, SVXY and VIXY $VXXDRE, $XIVDRE, $SVXYDRE, and $VIXYDRE Daily roll effect for the VXX, XIV, SVXY and VIXY LVI

The Lentz Volatility Indicator

Volatility 

Volatility Cone

Time 

Articles on VXX Trading Articles and materials available at:

www.optionvue.com/vxx.html

VXX Trading System The VXX Trading System is $1,000/year and includes:  Trade alerts and monthly status reports by email  A bulletin at the start of each month advising you on the current situation  Immediate alerts on signal changes  Access to our online VXX Trading forum where you can communicate with other traders  Access to proprietary VXX Trading indicators, including the main indicator (requires subscription to the OptionVue software)

Thank You for Watching! Order your VXX Trading Tools Now at the Optionvue Store

www.OptionVue.com www.DiscoverOptions.com 1-847-816-6610