2014 VIX Futures Expiration Days And Roll Period Lengths

As we head into 2014 I wanted to share the expiration dates for VIX futures in each month as well as the number of days in each roll period. Table below (source: CBOE Expiration Calendar).

Expiration Date           Roll Period Length
- Ending January 22:          22 days
- Ending February 19:        19 days
- Ending March 18*:          19 days
- Ending April 16:              21 days
- Ending May 21:              24 days
- Ending June 18:              19 days
- Ending July 16:               19 days
- Ending August 20:           25 days
- Ending September 17:     19 days
- Ending October 22:         25 days
- Ending November 19:      20 days
- Ending December 17:      19 days


*March expiration occurs on a Tuesday


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Volatility Trading Made Simple And Profitable

[Updated on 12/11/13 at 4:48pm PT]

Last week we added a new chart to the VIX Futures Data page which plots the daily closing value of the VXX Weekly Roll Yield, WRY, against its 10-day simple moving average.

This new chart provides traders with simple entry and exit signals that can be used to measure the momentum of VXX, UVXY, XIV, and SVXY.

There are two "halves" of this trading strategy:
1) being short VXX/UVXY (or long XIV/SVXY) whenever the WRY is below its moving average, and
2) being long VXX/UVXY (or short XIV) whenever the WRY is above its moving average.

Below is the current chart.


I've backtested the strategies separately for "short VXX only" and "long VXX only" from the inception of VXX (1/30/2009) through 12/10/2013. Decision points are made using the day's closing data (individual trades in the analysis can be viewed here).

For short VXX only:
  • # of Gains: 59
  • # of Losses: 47
  • Avg Return: +4.1%
  • Max Gain: +40.4%
  • Max Loss: -19.2%
  • Sum of Gains & Losses: +438.6%

For long VXX only:
  • # of Gains: 32
  • # of Losses: 74
  • Avg Return: -0.8%
  • Max Gain: +60.6%
  • Max Loss: -17.4%
  • Sum of Gains & Losses: -81.9%
---> Sum of all gains and losses: +356.7%


Below are the histograms for each of the strategies, grouping the number of trades that occurred in various blocks of percentage points.

The biggest block of returns for trades using the short VXX strategy is between -4% and 0%, which had 27 occurrences.


The biggest block of returns using the long VXX strategy is also between -4% and 0, which had 37 occurrences. Most of these trades experience gains in the first couple days but end up in a loss as VIX futures revert back to their mean.  

The Weekly Roll Yield chart is available to all Trading Volatility members. For more information on subscriptions see our subscribe page.

------------
Hypothetical and Simulated Performance Disclaimer
The results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for XIV, VXX, and ZIV as an approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.


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Watching For The Return Of Volatility

Hello and welcome back! I hope everyone had a great Thanksgiving break.

Today I wanted to provide a brief look back on volatility over the past several weeks and provide my thoughts on what it means going forward. Ever since the debt ceiling deadlock concluded in October, VIX has remained in a fairly tight range between 12 and 14. Meanwhile, the S&P 500 has notched eight straight weeks of gains.

In this post I'll be covering:
  • Technical Review
  • Forecast Review
  • Nov 15 VIX Reversal
  • Elevated SKEW
  • Trading Plan (Member Access Only)


Technical Review
Taking a look at the chart of implied volatility vs actual volatility (from the VIX Futures Data page), we can see that the current VIX range is roughly the same as what we saw in the July/August timeframe (orange highlight), which at the time, bounced along the floor set by HV60 (actual volatility over the last 60 trading days). Actual volatility in the S&P 500 has continued to decline since then and the HV60 floor is now two points lower, hitting 10.28 on Friday. This premium in VIX to HV60 tells us that options sellers are not yet convinced that the low volatility environment we are currently experiencing will continue into 2014.


The VIX futures term structure shows us a pretty consistent contango since mid October, with nearer months cheaper than the more distant months. Overall the movement has been mostly sideways with a slight decline across all months, while the front months futures have fallen more rapidly toward spot VIX.


Forecast Review
Looking at our forecast charts we can see that the Bias (left axis) has remained mostly negative for VXX and positive for ZIV. During this past 6 months VXX has declined from $80 to $45 (-43%), while VXX inverses (XIV and SVXY) have each gained 45%. Meanwhile, ZIV has increased 18%, moving from $30 to $35.80.




Taking a look at the VXX Spike Risk forecast we can really get a feel for how sleepy the volatility market has been lately with only a couple days above the 30% risk mark over the past 6 weeks.


Nov 15 VIX Reversal
On Nov 20th I posted in our Members' Forum about a possible reversal in the VIX daily chart that occurred on Nov 15th. While it is still possible to break lower, this remains something for VIX traders to watch in the coming weeks, especially as we press up against the 200 day moving average at 14.37 (red dashed line).


Elevated SKEW
The CBOE SKEW index has been elevated near 130 for a few weeks now (weekly chart below) and is at its highest levels since March 2012. This value tells us that the options market views a higher probability of returns that are two or more standard deviations below the mean over the next 30 days, which represents a 15%+ decline in the S&P 500. Given the recent run-up in stocks an expectation of a pullback isn't too surprising, but is something to be prepared for nonetheless.



Trading Plan (Member Access Only)
Please login to the Members' Forum to finish reading this article. If you're not yet a member you can join via the Subscribe page.






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Volatility Trading Outlook With The S&P 500 At All Time Highs

With the debt ceiling drama behind us the S&P has responded by making new all-time highs, while the VIX has fallen back to levels from Sept 20 and are VIX futures are back in a moderate contango. From the VIX Futures Data page:


Since Oct 18, VIX and VIX futures have been essentially frozen with intraday ranges of only a couple points for VIX and a range of closing values of just 0.38 points. The fact that VIX futures across all months are not declining, but flat (and ever so slightly up in months 3-7), is indication that all may not be well -- especially as the S&P is hitting all time highs. Usually when we see the VIX term structure hold steady like this investors are starting to pick up on some sort of risk on the horizon (see May 10th - 21st), however, no risk seems to be readily apparent at the moment (although I can name several that are on my mind). Maybe this is just a period of consolidation after a swift move down, but it doesn't quite sit right with me.

It is a five week roll period this month, with 17 trading days still left until November futures expire on Nov 20. Assuming we manage to avoid unforeseen drama during this time we should expect Nov futures to converge towards VIX (Nov currently at a 11% premium to VIX), and VIX to fall along with HV20 towards HV60. This will cause VXX to drift lower and SVXY higher, however the entire futures curve is once again rather compressed with limited room to the downside and larger risk to the upside. I see a ceiling for XIV over the next few weeks in the $32-33 area (~$125 for SVXY). For ZIV, $36 looks to be the limit.



With people increasingly predicting new highs and getting greedy I start to get concerned and like to raise cash. No one really knows if we'll go on like this for months or if the rally ends tomorrow, but all good things come to end so it's always good to take profits along the way and raise stops to help manage risk.


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Is VIX Expensive Yet?

Today the VIX closed at 16.6 while actual market volatility over the past month (HV20) closed at 8.71, resulting of a volatility risk premium of 90.6% (calculated as (VIX/HV20) -1 ) -- (See VIX Futures Data page).

Traders will often look at what is know as the "volatility risk premium" to determine if VIX is cheap or expensive. The volatility risk premium is essentially a comparison of the VIX (expected volatility over the next 30 days (annualized)) and HV20 (actual market volatility over the past 20 trading days, i.e. the trailing 30 days).

The logic is that the market going forward should typically experience a similar amount of volatility that the market has experienced in the past. However, we typically see a VIX greater than HV20 since sellers of options need to be paid a premium for a certain amount of risk that traders expect in the market. A greater amount of expected volatility will cause the premium to increase.

A simple interpretation of this measure is that VIX is considered "expensive" when it is much greater than HV20, and "cheap" when it is much less than HV20.

While this is a relative measurement, today's volatility risk premium of 90.6% looks pretty expensive. But don't expect to VIX to fall just yet.

First of all, the value is a ratio. As actual market volatility increases (during a large rally or large sell off) the ratio will get smaller (given a steady VIX).

Also, 90.6% isn't too crazy just yet. Below are some points over the past 10 years where the market saw other peaks in the volatility risk premium.
  • 2/15/12    151.5%     (VIX 21.14; HV20 8.40)
  • 3/5/12:     153.6%     (VIX 18.05; HV20 7.12) 
  • 5/18/12:   113.1%     (VIX 25.10; HV20 11.78)
  • 9/5/12:     195.2%     (VIX 17.74; HV20 6.01)
  • 12/28/12: 128.8%     (VIX 22.72; HV20 9.93)
  • 1/31/13:   157.8%     (VIX 14.28; HV20 5.54)
  • 4/1/13:       74.6%     (VIX 13.58; HV20 7.78)
  • 6/3/13:       62.9%     (VIX 16.28; HV20 9.99)
  • 8/9/13:     103.5%     (VIX 13.41 HV20 6.59)

The highest this ratio got before the Aug 2011 selloff was 64.1%, which occurred on 8/1/11 (VIX 23.66; HV20 14.42). After that HV20 then pretty quickly rose to a lofty 50.66 (8/29/11) and the ratio hit -36.3%.

More fun facts: 
  • The highest HV20 over the past 10 years was 85.19 (on 11/5/2008).
  • The highest VIX to HV20 ratio over the past 10 years was 289% on 12/31/10 (VIX 17.75; HV20 4.57)

Lastly, don't forget that if you trade VIX ETPs, they all track to VIX futures and what matters most is the term structure.

Happy Trading!


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Trading VIX Around the Upcoming Debt Ceiling Debate

With another debt ceiling debate looming just around the corner, many volatility traders ask "How do I play this event?"

Well to answer that question I like to first figure out where VIX is trading. Currently:

  • VIX sits at 14.42 (currently +9.9% on the day)
  • Actual volatility of the S&P 500 over the past  month (HV20) is at 11.50, 
  • Actual volatility over the past 3 months (HV60) is 9.58. 

These values tell us that a VIX of 14.42 is actually high given the amount of volatility that the market is actually experiencing -- VIX is at a 25% premium to HV20 and a 50% premium to HV60. The market is already expecting a greater amount of volatility in the next month compared to what we have experienced in the past 3 months.

The recent rise in VIX to 17 in late August was for the most part attributed to the events in Syria. Once was a diplomatic solution was "found" VIX began to retreat to normal levels. As you can see by the green circles in the graph below, VIX tends to fall toward the "floor" set by HV60. With HV60 currently below 10 and VIX at 14.39 there is still a long ways to fall (33%). However, just because the floor is down below 10 doesn't mean that it'll necessarily make it down there.  HV20 is on the rise, moving from 6.49 in early August to above 11 today, an indication that the market as a whole is growing more volatile.


An interesting point in the chart above is 8/30/13 (see red rectangle) when the value of front month VIX futures (M1) was 17.5 and HV20 was 9.58, an 83% premium. It is rare for front month VIX to be above 17 while HV20 is below 10. In fact, in the past nine years this has only happened a handful of times (7/2004, 12/2009, 3/2010, 11-12/2010, 1/2011, 4/2011, 2/2012, 8/2012, 12/2012). In most instances M1 and HV20 converge towards each other over the next 3-6 weeks then rise rapidly together as VIX and actual volatility spike. We'll soon find out if the 8/30/2013 instance follows a similar pattern.

But given that VIX is trading at a premium to actual volatility and VIX futures are in contango, the expectation is that VIX and VIX futures will continue to fall. That means the "correct" long-term play as of now, due to the structure of VIX ETPs, is to continue to short volatility both for near-term VIX futures (long SVXY/XIV or short VXX/TVIX/UVXY) and medium-term VIX futures (ZIV), although I believe that smaller positions are warranted given the compression in the VIX futures curve.

Now that we've taken a look at the technical side, let's get back to the question about the debt ceiling.

We've been through several rounds of debt ceiling political theater weighing on the stock market. After a few rounds of debt ceiling and sequester deadlines in the past 2 years the market seems to be getting used to the sequence of events, complete with a last minute deal to once again kick the can into the future.

One idea of how to play the Sept/Oct 2013 episode is to wait for a VIX spike that occurs in the final hours of negotiation just before the deadline and short volatility. History gives us some positive data that this could be a good play. However, this strategy depends on several points:

1) Will market participants fret enough to cause a rise in VIX in advance of the event?

  • In the July 2011 episode VIX ranged between 15 and 21. In Nov/Dec 2012 VIX ranged between 15 and 19.6. After hitting 12.52 last Friday, VIX is now at 14.32 with just one week left for congress to pass a "Continued Resolution" to continue spending after Sept 30th, and several weeks until all extraordinary measures to continue spending have been exhausted by the Treasury. Not only is the market not worried about this, but there's not even the infamous "countdown clocks" on the major media stations. I think you have to assume it will be political grandstanding business as usual and implied volatility will rise over the next several weeks, but it is not clear if this will happen as a gradual build up to the event, or more quickly just as the event is about to occur. Being long VXX over the next few weeks could be difficult given the "headwind" it faces due to the contango term structure. 

2) Will a deal get done?

  • I think the answer is yes and I believe the market believes the answer is yes. Whenever this happens, the immediate reaction will most likely be positive and make for a very good short volatility play (assuming there is a build up in VIX leading up to it). 

3) Will a market-positive deal get done?

  • Given the ratings downgrade and sell off after the July 2011 episode, this question should be of concern to investors as well. While a deal is likely to get done, investors will be looking at the "cost" of the deal. The details of  the deal, as well as the manner in which it is achieved, are just as important as the deal getting done in the first place. This will remain an unknown until it happens but is something to keep an eye on after the immediate reaction.
 
I prefer to take the information one day at a time to see how this episode plays out, closely watching for any significant changes to the VIX futures term structure and ensuring I have appropriate stops in place. The biases remain positive for SVXY, XIV and ZIV and negative for VXX, TVIX, and UVXY so I like to use those to my advantage while they exist.

Also remember that some periods of trading are easier than others. A directional move is easier to trade and more profitable than a choppy market, and you have to expect that the market over the coming weeks will be choppy and event-driven. There is a good case to be made to avoid this period altogether and wait for the "easy" money to be made once a new direction has been established.



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Update To VXX Spike Risk Forecast Algorithm

Today we made an update to our algorithm for the VXX Spike Risk forecast. The change is designed to refine the forecasts to provide increased accuracy.

The forecasts now estimate the probability of a spike in VXX of 7% or more (previously 8% or more) for the next 2 days (previously 3 days). The changes results in:
  • An overall lower spike probability for most days (due to the shorter prediction period)
  • An increased spike probability when spike conditions are present (due to a lower spike definition threshold)

See below for before and after graphs of the forecasted results over the past 6 months.

No changes were made to any of the Bias forecast calculations.



Before changes:


After changes [updated 9/18/13]:


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Free Membership Winners

Thank you again to everyone for supporting Trading Volatility last week in our 100,000th visit celebration. The winners of the one free month memberships to Trading Volatility+ are:

Current Members
@JHavlik
@phippen99

Non-Members
@atn1972
@SaudOptions
@dingothebear

Please go to your Twitter page and check your direct messages for further instructions on getting you set up on the subscriber site.


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Celebrating 100,000 Visits To Trading Volatility With Free Memberships

The mission here at Trading Volatility has always been to help those interested in trading volatility ETFs to be more successful by providing the data analysis tools and education in order to demystify these complex products.

We have made good progress in our ability to reach people and are extremely excited to celebrate our 100,000th visit to Trading Volatility this week. To show our sincere gratitude to everyone who has supported us, we will be removing the one week delay on the VIX Futures Data and Daily Forecasts portions of the site for the remainder of this week.

Also as part of the celebration we will also be giving away five 1-month memberships to the Trading Volatility+ subscriber site.
  • Three 1-month memberships will be given away to current non-members
  • Two 1-month memberships will be credited to existing members
  • To be eligible to win, just retweet this message between now and Sept 8th. Winners will be selected at random on Sept 9th.

I am thrilled that we have been able to help so many people sort through the complexities of volatility funds and look forward to reaching our next milestone together.


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Most Popular Posts: Tools And Resources To Help Simplify Trading Of VIX ETPs

For most people, the concepts of volatility-related ETFs and ETNs are difficult to grasp. If I just state what they are by saying that they track the daily change of values for the expected annual dispersion of the stock market at different at points in time between 1 and 7 months into the future, I don't get many looks of understanding. 

And it's not because people aren't smart. I've had conversations on the topic with people coming from highly intellectual backgrounds including doctors, lawyers, engineers, actuaries, CEOs, CFOs, even financial investment professionals. The most positive response I usually get is a subtle indication that they are still awake while I'm talking.

The fact is that these are complex products engineered by the issuing banks to produce specific results. One could even go so far to argue that some of the securities are designed to be confusing and/or to lose money. For example, VXX has lost 99% of its value since its launch on Jan 30, 2009. TVIX has lost 99.8% of its value since it was launched on 11/30/10. Both of these have undergone multiple reverse splits and TVIX has another 10:1 reverse split planned for Aug 30th.

However, not all VIX futures products decline in value. The securities XIV and SVXY provide the daily inverse of VXX, meaning that if VXX declines by 1% on a given day, the value of XIV and SXVY increase by 1%. 

What many people don't realize is that the performance of these securities are a direct result of how the products are structured. Rather than being a matter of supply and demand, as is the case with stocks, these funds are driven by the values of two or more VIX futures, which creates a bias either for or against their long term value. It would not be surprising to see VXX and TVIX lose another 99% of their value in the coming years should the issuing banks continue to issue reverse splits assuming the underlying structure remains biased against them. 

The whole key then is to identify where the biases exist and then get on the right side of the trade. Trading of these products can be highly profitable if done correctly.

This entire site was created to help people do just that. In addition to providing VIX Futures Data and Daily Forecasts, I have written many blog posts about how VIX ETPs work. Today I'd like to re-share what I think are the absolute must-reads for anyone interested in trading these securities. There's always room to improve so I will continue posts in the future, but in the meantime take a look through the articles below and feel free to reach out to me with any feedback or questions you may have.



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TD Ameritrade Now Tracking VIX Futures

In a move to address the growing popularity of VIX Futures, TD Ameritrade yesterday added the ability to quote and trade VIX futures directly.

Here's a helpful guide to build your own list of VIX futures:

SYMBOL - CONTRACT EXPIRATION
/VXQ3 - Aug 2013 VIX Futures
/VXU3 - Sep 2013 VIX Futures
/VXV3 - Oct 2013 VIX Futures
/VXX3 - Nov 2013 VIX Futures
/VXZ3 - Dec 2013 VIX Futures
/VXF4 - Jan 2014 VIX Futures
/VXG4 - Feb 2014 VIX Futures
/VXH4 - Mar 2014 VIX Futures
/VXJ4 - Apr 2014 VIX Futures
/VXK4 - May 2014 VIX Futures (does not exist yet)
/VXM4 - Jun 2014 VIX Futures (does not exist yet)
/VXN4 - Jul 2014 VIX Futures (does not exist yet)

Details on trading VIX Futures contracts directly can be found on the CBOE website.


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Daily Bias And Spike Risk Forecasts Now Available Via Email

Our Bias and Spike Risk Forecasts are now available via daily emails to subscribers. Rather than having to visit the website everyday to check these numbers you can have the forecasts automatically emailed to you to save you time and help reduce the chance that you miss a critical change in the bias or spike risk. 

The emails also contain closing prices for VIX, select VIX futures, and VIX ETFs.

If you'd like to receive these updates just let us know.


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Looking Ahead At VIX & VIX Futures Near All-Time Market Highs

The stock market has been rallying in full force over the past month with the S&P 500 up 7.2% since it put in its low on 6/24.

VIX has fallen 34.5% since that date with VIX futures following suit across the board (see chart below), driving VIX-related ETPs accordingly:



  • XIV:  +40.7%
  • ZIV:  +16.6%
  • VXX: -30.0%
  • UVXY: -52%



  • Our Daily Forecasts have performed well over this time, with the VXX bias shifting from positive back to negative on the evening of 6/21...


    ...and the VXX Spike risk dropping back below the danger zone (60%) on the evening of 6/25 and staying there ever since.


    Actual historical volatility of the S&P 500 has started coming into play to hold the VIX up a bit. HV60, the actual volatility over the past 3 months (60 trading days), is serving as a floor to the VIX, as can be seen in the chart below.


    For trading of VIX ETPs over the coming weeks what's important to note is...

    Continue reading this post on the Members' Forum

    If you are not yet a member you can Subscribe for access to Trading Volatility+.



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    BlackRock Confirms: Volatility Is A Valuable Asset Class

    While not necessarily news to those who have been in on the volatility game for a while, BlackRock's decree to the world that volatility is an asset class should open more investor's eyes to this excellent trading vehicle.

    BlackRock, which manages $3+ Trillion in assets, specifically prefers to sell equity volatility -- a common theme here at Trading Volatility as well as with many others who have come to love shorting VXX, UVXY or being long XIV and ZIV over the past few years.

    A couple quotes via the Forbes article:
    "Volatility is an asset class that can be harnessed to increase returns and reduce risk, according to the firm. BlackRock favors selling volatility via futures on the CBOE Volatility Index (VIX), puts on the Standard & Poor's 500 index and other securities, and variance swaps. These short volatility strategies are integrated into the equity allocations of investment portfolios."

    "Selling volatility on a broad equity index has a positive expected return premium over time, as the seller effectively provides insurance to the buyer of volatility"



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    VIX Nears A Floor After A Week Of Heavy VIX Selling

    VIX took a holiday as well this week falling 11.9% from last Friday's close. The VIX Futures term structure contango steepened as all months along the curve fell in proportion to VIX. Here's the week over week change in term structure:


    From our daily forecasts we can see that after a month of elevated spike risk, the VXX Spike Risk forecast fell below the 5.0 "danger zone" on the evening of June 26th and remained there this week, with VXX losing 12% since that time (and XIV +13.3%).


    Spot VIX is starting to press down towards the VIX "floor" set by actual market volatility over the past 3 months (HV60), with VIX now just 5% higher than HV60. We could still see VIX press down into the 13s, but I don't expect it to head much lower (see green circles below).



    UPDATED 7/8: Corrected week-over-week term structure chart and VIX % change


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    Reviewing June's VIX ETF Forecasts And A First Look At July

    June was a tough month for inverse VIX ETFs such as XIV and ZIV. A relatively flat term structure and somewhat skittish markets led to losses of 10.9% for XIV and 9.3% for ZIV.

    Let's take a look at what the Trading Volatility daily forecasts were telling us over the past 5 weeks.

    The VXX Spike Risk forecast spent nearly the entire month (from the evening of 5/28 until evening of 6/26) above 6.0, indicating an above average probability of VXX spiking. During this time we saw a rash of days with VXX gains as it rose 18%.


    Looking at the chart of the VXX bias forecast vs VXX price we can see that the VXX bias spent most of June in or on the edge of VXX neutral zone (between -1 and +1) which was not enough to offset the rise of the underlying values of the VIX futures.


    Similarly, ZIV suffered from the high VXX spike risk and relatively small bias of its own.



    Overall, the VIX futures and market dynamics looked a bit like the May-July 2011 timeframe, which saw mostly sideways & choppy action. If we see more of the combination of a neutral VXX bias and high spike risk it will turn into a 2007-type dynamic (flat term structure and rising futures along the whole curve) which could justify VXX long positions, even with a slightly negative VXX bias.

    As we look forward to July, we can see from the forecasts above that the VXX spike risk finally dropped below 5.0 on 6/26 and the VXX bias has started to grow more negative. This will create a better environment for XIV and ZIV as long as this forecast trend continues.


    About the Trading Volatility Forecasts
    The Trading Volatility daily bias forecasts provide important information about the headwind or tailwind of VXX, XIV, and ZIV based on the VIX Futures term structure. Over longer timeframes, a positive bias will help the price of the security to move up while a negative bias help push the security go down.

    The Trading Volatility spike risk forecast indicates that the structure of VIX and VIX futures put VXX at risk for moving higher in the next 1-2 days. When this value is above 5.0 I often look for ways to protect my portfolio by reducing exposure to XIV & ZIV and increasing exposure to VXX.

    You can read more about Trading Volatility's forecasts here.

    You can get access to the current daily forecasts and other VIX futures data by subscribing to Trading Volatility+ for less than $3 a day.



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    When XIV Loses Its Edge: Getting Into Defensive Mode

    Actual market volatility has clearly picked up over the past month as the broad market tests both upper and lower ranges to figure out the next major direction.



    As I discussed in our members' forum post on 6/14, I expect choppy conditions and urge caution for XIV longs over the next few months. During this time there will be streaks of days where VXX will gain and streaks when XIV will gain, but over the course of weeks I tend to think the wide price swings will prevent either of these from really going anywhere. 

    Overall the volatility futures market is not sending very positive signals, as we can see from the data on our VIX Futures Data page.

    The premium of front month VIX futures to VIX has been decreasing (a concept I outline here):



    The slope of the term structure is flattening (which I define as important here):


    I think there are still opportunities to make money by trading XIV and VXX in these swings but it requires a more active trading strategy with shorter hold times (a few days), and use of smaller positions since trends will be unpredictable. The VXX bias remains small meaning that the "edge" in trading these products is mostly gone for now, so trading these swings also requires a bit of luck as it ultimately becomes a guessing game for the next direction -- a strategy that is not usually profitable.

    I'm inclined to keep a good amount of my portfolio in cash and put some money in ZIV where the price swings are smaller, as long as the bias forecast is positive and I can still get a decent roll yield.

    Picking up some VXX here is very tempting as I think there is a good chance it heads higher over the next few months, but again I think in the short term it will see some wild swings so I prefer to wait until there is a positive bias behind it even if it means missing out on some of the gains.


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    VXX Continues To Drive Upward

    VIX and VXX continued their upward trend today with the VIX futures term structure flattening substantially, making it impossible for XIV and ZIV to make any upward progress.

    We've been playing in the danger zone ever since the VXX Spike Risk gauge from our Daily Forecasts moved above 5.0 on 5/28, with VXX +16% since then. The flattening of the term structure today marks another possible shift in sentiment and puts the curve at risk of flipping to backwardation.

    We're at a point where it is critical that...

    Continue reading this post on the Members' Forum

    If you are not yet a member you can Subscribe for access to Trading Volatility+.



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    Members' Forum Now Available

    Today I am happy to announce the addition of an integrated members' forum to the Trading Volatility subscriber site.

    The Forum will make it possible for Trading Volatility+ subscribers to discuss, ask questions, and share knowledge and ideas about trading VIX-related products. By pooling our collective knowledge members can help each other to improve their trading skills and increase profitability.

    I will also be using the forum as a venue to share my thoughts on the market to augment the updates I send to Trading Volatility Insiders. This will allow for more open conversations and serve as an archive for reference.

    If you are currently a subscriber you can go directly to the Forum to sign up.

    If you'd like to become a Trading Volatility+ subscriber you can do so at the Subscribe page. We are currently running discounts on new memberships through June 20th, 2013 as part of our launch celebration so join today!

    See you on the Forum!


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    Another Big Week For VIX - Is There More Upside?

    Another week of gains for VIX (+16.5%) has made for a +30.9% move over the past 2 weeks. VIX futures gained as well this week, driving VXX up 3.4% and ZIV down 0.8%. Below is a view of the VIX futures term structure week over week:




    While the VXX bias remained dismally low all week, on Tuesday evening our VXX Spike Risk Daily Forecast algorithms moved into the danger zone with a reading of 5.9. Since then VXX has gained 6%.



    Our Trading Volatility+ members had the opportunity to use this information to act accordingly and mitigate risk in their trades. For just $2/day via a 6-month subscription, having access to this insight to help mitigate losses and improve gains is an absolute bargain.

    XIV is now down 7.0% since our Trading Volatility Insiders received notice that we were drastically reducing our holdings on May 17th. We'll continue to keep Trading Volatility Insiders updated on all our trades and provide other market insights at no additional charge for all Trading Volatility+ subscribers.

    Access to the daily forecasts, our trade notifications, and everything else outlined on the Trading Volatility+ page is available through subscription. For those interested we are currently offering a $120 discount on 6-month memberships through June 20th as part of our service launch celebration.



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    VIX Futures Market Update - 5/28/13

    Last week saw a rise in volatility across the entire curve, with spot VIX leading the way at +13.12%.

    With this move, both the short term futures inverse fund (XIV) and medium-term futures inverse fund (ZIV) lost ground on the week at -3.8% and -3.6%, respectively. Trading Volatility Insiders were informed on May 17th that we reduced our holdings in both of these funds to just half positions, thus reducing our exposure a bit until there's a better trade setup.

    Trading Volatility+ subscribers will be keeping a close eye on our Daily Forecasts and VIX Futures Data as market conditions change in order to identify the next trading opportunity. At this point the roll yields for XIV and ZIV remain positive but are relatively small and provide only a slight tailwind. The equity markets are showing some signs of exhaustion in this rally and the VIX futures continue to indicate that caution is warranted.

    Subscribers to Trading Volatility+ can also choose to receive updates from the Trading Volatility Insider service which includes notifications of our trade entries/exits at no additional charge.

    You can sign up to become a member at the subscribe page. We are currently offering a 25% discount on 6-month memberships through June 20th as part of our service launch celebration.


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    Notice: Update To Historical Volatility Calculations

    Changes have just been made throughout the site to the number of days that are used to calculate historical volatility.

    - The 1-month lookback period now uses data from the 20 most recent trading days (HV20) instead of 21
    - The 3-month lookback period now uses data from the 60 most recent trading days (HV60) instead of 63

    The changes bring these metrics into line with what most traders are familiar with.


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    VOTE: A Trading Volatility Forum?


    Looking to get your feedback on the idea of a Trading Volatility forum.

    The idea would be to have a place where members can interact with each other and share their collective knowledge on strategies, technicals, insights on current conditions, etc for trading VIX products.

    Vote below.

    Free polls from Pollhost.com
    Would you be likely to use a forum on the Trading Volatility website as a place for members to share ideas about VIX-related trades?

    Yes   No     



    UPDATE [5/14/13]: There appear to be a lot of interest in this idea. Look for it to be ready in the near future!


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    New Subscription Services And Other Changes Coming To Trading Volatility

    Today I have some important announcements to share with you all regarding the Trading Volatility website.

    First though, I would like to thank all of you for supporting Trading Volatility. Your interest and enthusiasm for the site has been a huge source of motivation for me to continue to make improvements in order to make this one of the best volatility trading resources available on the Internet. I also want to send an extra special Thank You to those who have donated to the site. Your contributions have helped the site to grow during a critical phase.

    I've really enjoyed helping people learn how to navigate the world of volatility products by sharing the knowledge and tools that I've built over the years. The number of visitors to the site has increased dramatically recently, and at times it’s been difficult to keep up with responding to all your great questions and comments.

    I want to continue to be able to provide you with the information you need to successfully trade volatility products and to expand the site's capabilities, but in order to do that I need make a few changes.

    Starting May 18th, some portions of this site will no longer be accessible for free. Instead, a new site, Trading Volatility+, will be made available to paying subscribers. For details on what exactly will change please see a description of the services below.

    Access to Trading Volatility+ will be available for $80/month. However, during the next month I am making a six-month subscription available for $360 as a thank you for supporting the site in this early stage.

    If you later decide that the service isn’t for you for whatever reason and would like to cancel your access to the site, just let me know and I’ll be happy to issue a prorated refund based on the time remaining on your subscription.

    I've also had many requests for a service which communicates my VIX ETP entries and exits. The delivery mechanisms and details of the service, Trading Volatility Insider, are still being worked out. So for now this will be unofficially available at no additional cost to any Trading Volatility+ subscribers who are interested. After you sign up for Trading Volatility+, send an email to jay@tradingvolatility.net and let me know you’d like to be added to the list of people to receive updates.

    For expanded descriptions of the services that will be available please visit the Trading Volatility+ page.

    Referral Bonus: Do you love what Trading Volatility offers? Recommend us to a friend! For every paying subscriber you refer to us you’ll get a free month of access to Trading Volatility+.** 


    Service Description Overview (effective 5/18/13):
    TRADING VOLATILITY (free site)
    *VIX futures term structure chart
    *VIX futures quotes
    *Historical market volatility quotes over various lookback periods (2 week, 4, week, 6 week, and 3 month)
    *Intraday SPY Arbitrage model
    *Delayed data (by 1 week): all forecasts, historical VIX data charts, and daily SPY arbitrage model
    *Past Trading Volatility blog posts outlining the ins and outs of volatility ETPs

    TRADING VOLATILITY+
    VIX Futures Data
    *VIX futures term structure chart
    *VIX futures quotes
    *VIX Futures metrics (XIV and ZIV roll yields, ratios of forward volatility to historical volatility, premium of front month futures to VIX, and term structure slope)
    *Historical market volatility over various lookback periods (2 week, 4, week, 6 week, and 3 month)
    *Six month chart of VIX Futures data
    *Six month chart of actual volatility vs implied volatility
    *Six month chart of front month futures to VIX premium
    *Six month chart of term structure slope
      
    Daily Forecasts
    *VXX Bias + 6 month historical data
    *VXX Spike Risk + 6 month historical data
    *ZIV Bias + 6 month historical data

    SPY Arbitrage
    *Intraday SPY Arbitrage model
    *Daily SPY Arbitrage Model

    TRADING VOLATILITY INSIDER (coming soon)
    *Notifications of trade entries & exits


    _______
    **Each referral must pay for and maintain membership to Trading Volatility+ for at least one month in order to receive the referral bonus.



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    The Week Ahead In VIX Futures - 5/7/13

    Volatility futures across all months have been back on the decline at a fairly even pace since the spike in mid-April, as can be seen below (all charts from the VIX Futures Data page)


    You can see that the overall spread and spacing between month 1 and month 7 has stayed pretty constant during this time, making for a consistent contango term structure.

    You may also notice that the lines are more compressed during this time than they have been in previous months. This compression represents a flatter term structure, which can be specifically measured (using calculation of ln(M7/M1)) and plotted on the graph below.



    It's another way of looking at how the slope of the term structure curve changes over time. The previous two graphs are on the same timeframe so you can directly compare what the slope looks like on days with a wide separation vs days with a narrow separation. For the past two weeks the slope of the term structure has stayed fairly constant in a pretty weak contango, with readings between 0.2 and 0.25.

    I made a point about the flattening of the term structure last Wednesday as the slope reached 0.19 and the VXX Spike Risk gauge hit 5.8. The following day (May 2nd) the markets rallied and the term structure steepened back up, staying above the 0.20 mark which I find to be critical to maintain to keep inverse VIX products (XIV & ZIV) moving upwards.


    So where does that leave us going forward? To answer that we move on to the Daily Forecast page.

    Looking at the recent VXX Bias values, the time to look at going long XIV was when the VXX gauge crossed from  positive to negative bias on 4/17.


    However, the value on the VXX Spike Risk gauge for the same day showed that the risk was a 7.3 (out of 10), indicating that VXX was very likely to see more upside:

    As I noted in my recent post on using the forecast gauges, the bias is the best predictor for long term price movement while the spike risk is better for price in the next couple of days.  So according to the model, the best play was look to get long XIV was on 4/17 while VXX spiked (XIV dropped). Although because the risk gauge was elevated you want to manage that risk through either VXX call options or a smaller position until that risk gauge fell back below 5 (on 4/23). Note: Had the VXX Bias gauge turned back positive for the 4/18 forecast I'd look to exit XIV promptly.

    As of today the bias remains negative for VXX so the best play is still long XIV / short VXX. The roll yield remains small, however, and the spike risk is a moderate 4.6. This is still reason for caution, and if you're not a position here already it's probably not the best time to jump in.

    In terms of further downside for VXX over the next week, we're not yet in the basement as VIX could still push on down towards 3-month historical/actual volatility (HV63) which sits at 11.60, near the March VIX lows.


    Looking at the ZIV forecast you can see that the bias remains positive although it appears that it could be slowing. I think this is another instance of something that is correct to stay in if you're in it, but not a great time to enter (also see the 2 year view of the ZIV bias if you haven't already).


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    Updates To XIV And ZIV Roll Yield Calculations; List Of Number Of Days In Remaining 2013 Roll Periods

    I made a slight adjustment to the calculations of the roll yield per week for XIV and ZIV on the VIX Futures Data page. The values shown now factor in the exact number of days in the roll period (previously the calculation used a constant 21 days as an approximation).

    The impact of this change is a reduction of the yield estimates that were reported yesterday by about 0.2% since the roll period for ending May 21st contains 25 days.

    Below is a list of the number of days in the remaining roll periods this year.
    - Ending June 18:   19 days
    - Ending July 16:    19 days
    - Ending Aug 20:    25 days
    - Ending Sep 17:    19 days
    - Ending Oct 15:    20 days
    - Ending Nov 19:    25 days
    - Ending Dec 17:   19 days

    For more information on roll yields see this post.


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    New to Daily Forecasts: Addition of ZIV and Tracking of Forecasts to Results

    Volatility ETPs can be tricky to trade but you can actually do pretty well just by adhering to the #1 rule: Follow the term structure. However, the market sends additional signals on future price movements that can be decoded if you know where to look. Paying attention to these signals can help improve your trading performance. 

    When the day's action is over and VIX futures have settled I will look at various VIX futures metrics (found on the VIX Futures Data page) and make a determination if I should buy, sell, or hold various VIX ETPs. To better communicate my outlook on these products I've rolled up most of the metrics I use in making decisions into Daily Forecast gauges.

    I first introduced these gauges last month. Today I've expanded the daily forecast to include ZIV and I've added some charts to track the daily forecasts against the actual performance of the securities.

    For the VXX forecast there are two components to the VXX forecast - the Bias and the Spike Risk. 

    VXX Bias 
    This gauge measures the bias of VXX and is largely determined by the roll yield (more on the roll yield in this post), which can be conceptualized as a headwind or tailwind. The gauge values are on a scale from -10 to +10, with a more negative reading indicating a stronger negative bias (headwind), and a more positive reading indicating a stronger positive bias (tailwind).

    May 3, 2013 Update: Note that the gauge's range was expanded yesterday to cover +4 and -4 standard deviations from the past 9 years of data for a total of 8σ (previously was 6σ). This tweak to account for a wider range of values has the effect of making the numbers on the scale smaller than they were previously but everything is still on a scale of -10 to +10. The neutral zone is now at +/-1.

    March 2, 2014 Update: The Bias indicators now include inputs for the direction of short-term price movements. See this post for details.

    VXX Spike Risk
    The second forecast gauge reflects the probability of a sharp spike in VXX in the very near term (1-2 days). As inputs, it takes data from the term structure of the front two months of VIX futures, the premium of front month futures over (or under) spot VIX, historical volatility, and recent moves in spot VIX to identify various risk conditions.  All risk conditions are then weighed together to provide a single output to represent the total risk. The higher the reading, the greater the risk of a large magnitude spike.

    The gauge's output is a scale of 0 to 100%. Values below 25% indicate a low risk of a spike in VXX. Values between 25% and 60% are moderate risk. Values above 60% are high risk. Typically any reading above 50% is cause for some concern.


    Using the Bias and Spike Risk Gauges Together
    The Bias gauges provides a view of the direction of VXX and ZIV over a medium timeframe. There may be occasional moves in the opposite direction, but over the course of several weeks, the price of VXX will typically move according to the Bias of the gauge.  Red means it's going down, green means it's going up, and yellow means sideways and generally choppy conditions.

    The Spike Risk Gauge gives information about the probability of moderate or large spikes on a more short timeframe (1-3 days out). When long XIV (or short VXX/UVXY), this can serve as a signal to make sure you are adequately prepared for such a move just in case, i.e. reduce positions, exit positions, buy protective VXX calls, set stops, or maybe just get mentally prepared to see the value of your holding go down.

    Obviously there are market/world events which will cause VIX and VXX to spike dramatically without warning. While this model cannot predict the unexpected, it does provide the ability to detect shifts in investor sentiment of known macro risks.



    ZIV Bias Forecast
    The ZIV forecast only has a bias gauge because the VXX spike gauge can be applied to ZIV. The differences being that ZIV will move in the opposite direction and generally at a smaller magnitude. Similar to the VXX bias gauge, the ZIV bias gauge estimates the direction and strength of ZIV based on the shape of the term structure, but also includes an adjustment based on the shape of the front end of the curve under certain conditions. The scale is also from -10 to +10 with the neutral zone at +/-0.5. As you can see below, the reading based on Thursday's forecast of 2.7


    Tracking Forecast Results
    To give this some context I've included a six month view of data comparing the values of the forecast to the price of ZIV at the bottom of the Daily Forecast page. For an extended look at the ZIV forecast, below are the results from April 2011 to present (forecasts on the left axis; ZIV price on the right axis (log scale)). Generally long ZIV is a good play when forecast values are in the green zone on the bias gauge (above 1).



    Similarly for VXX, the 2 year chart shows that being short VXX when the bias is below -1.0 (red zone on the gauge) and long VXX when the forecast is above 1.0 (green zone on the gauge) are very good trades. Note the choppiness in the price of VXX when the forecasted bias in in the neutral zone (forecasts on the left axis; VXX price on the right axis (log scale))


    The 2-year chart of Spike Risk vs VXX % Change is a bit harder to read on this time frame but I've included it below anyways. A well-formed model will have a reading of 50% or higher (left axis) prior to any significant daily spikes in VXX (right axis). You can alternatively view the 6 month chart on the Daily Forecast page for a cleaner view on a shorter time frame.



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    VIX Futures Flash Warning Signs

    Some negative developments in the VIX futures term structure occurred today with a flattening of the term structure (see full current term structure data here):
     - Spread between M1 and M2 narrowed to -0.75
     - Spread between M4 and M7 narrowed to -1.15
     - Spread from M1 to M7 narrowed to just -3.15 points

    The roll yields for XIV and ZIV fell to 1.1% and 1.5%, respectively.

    To put the M1-M7 spread in context here is a view of the slope of the VIX futures (left axis) along with the price on XIV (right axis). A slope reading below 0.2 has typically been market negative in the very short term over the past few years (today's closing was 0.19).



    The rise in VIX to 14.49 (+7.2%) brings it to within 5% of front month futures and increases the risk of a larger VXX spike in the short term. The volatility risk premium remains negative, with actual volatility over the past month (HV21) at 14.77.

    The VXX forecast VXX spike gauge reflects these changes with a reading of 5.8. When the reading on here is above ~5.5 you can generally expect some choppiness in the price of XIV & VXX as a best case, and worst case of some large VXX moves upward.



    Because of these current conditions and a multitude of warning signals I'm still not interested in a XIV long position. As I've suggested in the past week herehere, and here it makes sense to look into some cheap VXX calls as a hedge if I were long XIV/SVXY or be out altogether.


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    VIX and SPY Show Positive Correlation For 4th Day In A Row

    VIX Futures down slightly today, but remain largely unchanged at the close for 4 days now. The S&P pushed up to within a point of new all-time highs during the day but VIX futures diverged as can be observed in the intraday SPY arbitrage model.


    With the VIX futures term structure mostly stationary the spread for the front two months remained at -0.85 making for a roll yield that isn't benefiting XIV much (this lack of movement has also resulted in a mostly stationary VXX Daily Forecast).

    Spot VIX also diverged from its normal inverse correlation to the SPY again, making it 4 days in a row or positive correlation. I'd love to see someone run through the data on this to see when the last time was that this happened (typically positive SPY-VIX correlations are negative for the market in the following days).

    VIX remains 5.6% below actual market volatility over the past 30 days (HV21 at 14.53) resulting in a continuation of a negative risk premium. While this is unusual it's not unheard of, especially after a recent spike in VIX like we saw in mid-April. If we get a few more low volatility days in the market HV21 will come down to about 13.75 by Thursday.



    The daily SPY arbitrage model is still holding a pretty wide spread as well:



    Given that the usual correlations seem to be temporarily broken and the contango spread is neutral it seems best to continue to wait it out a bit for a more profitable setup. Alternatively, if I owned XIV/SVXY I still think it's a good idea to pick up some cheap VXX calls as I mentioned via Twitter last Wednesday.


    UPDATE
    Performance of S&P 500 after 3 or more consecutive days of positive SPY-VIX correlation, from 3/2004 to present:




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    Retirement of the Twitter Sentiment Analysis Tool

    While I find the information from the Twitter Sentiment Analysis tool to be interesting, it doesn't lead to any actionable trading in its current format.  Because of this I've decided to remove it from the site.

    I will continue to track the sentiment data to see how it correlates with the price of VXX over a longer period of time to see if there is a more usable format, but I tend to think that the tool is better suited for gauging interest in individual stocks rather than ETPs.

    As a final chart, below is a view of the daily net Twitter sentiment of VXX compared to the daily percent change of VXX over the past month.



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    The #1 Rule For Trading Volatility ETFs

    Every couple weeks or so I see a new article from someone giving advice on how to trade volatility ETFs & ETNs such as XIV, VXX, SVXU, UVXY, and ZIV. Often the author will at least know that these products trade based on the VIX futures. But every once in awhile I'll see something more misguided, like the chart below. While it looks promising, once it is applied to historical data it does not deliver positive results.


    For example, let's take a look at the period between August 2004 and May 2006 when VIX bounced between 10 and 16 (VIX on left axis; VXX on right axis). The chart says buy VXX below a VIX of 16.



    The return for VXX during this time was -75%, a loss attributed to the fact that the front two months were in contango with a spread averaging 0.98.

    Let's continue on to the next period, between May 2006 and Feb 2007 when VIX was spending much of its time between 10 and 12.  The result for VXX is a 57% loss, and again the reason is a contango term structure, with an average spread between front month futures (M1) and 2nd month futures (M2) of 0.85.


    You may point out the spike in VXX from $1000 to $1350 on the left hand of the chart, which is a nice 35% gain. Unfortunately, if you were following the chart and buying XIV when VIX rose above 16 then you would have lost 30% over the next couple of weeks before almost breaking even if you held your position until VIX dropped below 16 again.

    OK, so I can hear some of you saying that I'm cutting off the chart before VIX and VXX spikes. Take a look at the next period, from Feb 2007 to Feb 2011 when VIX spiked during the 2008 crash. During this time VIX was above 16. Since the chart above says buy XIV when VIX is above 16, I'll compare VIX (left axis) to the price of XIV (right axis).



    The result is a 64% loss up until Dec 2007, followed by another 66% loss from Aug 2008 to Dec 2008, for a total of an 88% loss in XIV from 2/27/07 to 12/19/08.  At this point your position has essentially been demolished after this 21 month period. But let's give you the benefit of the doubt and say that you stayed solvent and held on to this position for the 4 year period until VIX dropped below 16 again. In that case you managed to almost break even in that XIV trade.

    Looking at the term structure during this period, we find that between 2/27/07 and the bottom in 12/19/08 the term structure was in backwardation, with an average of a 0.67 spread between the first two months. Backwardation has the effect of making VXX rise and XIV fall.

    From 12/20/08 to 3/24/2011, when the price in XIV goes up from 2 to 14 for an excellent 7x return, the term structure is back in contango with an average of 1.51 points between M1 and M2. Contango has the effect of making XIV rise and VXX fall.

    At this point, the #1 rule in trading volatility-based ETFs should be clear: Follow The Term Structure.

    The term structure is going to be the biggest driver of price for volatility-based ETPs over time. There are of course other factors that need to be taken into account when trading volatility ETPs in order to maximize your gains, but you will be able to trade these products pretty well just by following this rule.

    To view the current term structure and other metrics that are critical to trading volatility ETPs, visit the VIX Futures Data page.


    **Note: VXX and XIV price data prior to the funds' first trading days (1/30/2009 for VXX and 11/30/2011 for XIV) have been calculated by using the VIX short-term futures underlying index values derived from actual data of month 1 and month 2 futures.



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