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Trading the VXX for Outstanding Returns

Trading the VXX for Outstanding Returns. What is the VXX?. ETN (exchange traded note) representing a standard 30-day VIX f utures price. Contract Price Days Remaining VX Jan 15.90 14 VX Feb 16.90 43 VX Mar 18.15 72

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Trading the VXX for Outstanding Returns

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  1. Trading the VXX for Outstanding Returns

  2. 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 43 VX Mar 18.15 72 VX Apr 19.40 104

  3. What is the VXX? VXX holds proportionate amounts of the 1st and 2nd VIX 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

  4. Next Day VXX must shift its holdings from the 1st into the 2nd VIX futures contracts. Example: 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

  5. Trading System Proprietary indicator: $VXDIF = Price of 2nd VX future - Price of nearby FX future We use a 15 day moving average of the $VXDIF

  6. Results The result is an amazing 54.4 times your money in the 3.5 year period beginning Jan 30, 2009. (XIV is an ETN that is a mirror image of VXX)

  7. 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

  8. Results Again beginning at Jan 30, 2009, the trades signaled by the refined approach were: (A remarkable 79 times your money in 3.5 years)

  9. Actual Results OptionVue Clients (+70%) Study period ending date

  10. Roll Yield 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

  11. Roll Yield 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. Called “rolling”. Normal term structure 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

  12. Term Structure Example of a backward term structure. Backward term structure Contract Price Days Remaining Holding VX Jan 41.60 13 47% VX Feb 34.90 45 53% VX Mar 29.35 71 VX Apr 27.44 103

  13. 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

  14. 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

  15. Effect of Roll Yield Normal Term Structure  Negative Roll Yield, depressing the VXX price Backward Term Structure  PositiveRoll Yield, enhancing the VXX price

  16. Effect of Volatility Changes Increasing Volatility  VXX Rises Decreasing Volatility  VXX Falls

  17. The Two Forces Affecting VXX Price Changing Volatility Levels (Immediate, impactful) 2. Roll Yield (Subtle, slow, steady)

  18. Warning: VXX and XIV are volatile Proceed at your own risk! Example, after our clients bought in at around 10.7, the XIV dipped down to 8.1 just 5 weeks later. Still, the use of stops is not recommended.

  19. 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 Fair value of the VXX $XIVFV Fair value of the XIV $VXXDRE Daily roll effect for the VXX $XIVDRE Daily roll effect for the XIV The Lentz Volatility Indicator

  20. Articles on VXX Trading Articles and materials available at: www.optionvue.com/vxx.html

  21. Alternative Instruments 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

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