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