VIX and VIX ETNs

What They’re All About and How to Trade this Exciting Market

Dan, The Trading God dan@tradinggods.net http://tradinggods.net Ridgeline Media Group, LLC. 70 SW Century Drive Suite 100-148 Bend, Oregon 97702

VIX and VIX ETNs What They’re All About and How to Trade

This Exciting Market

Table of Contents

Chapter 1: VIX Overview - What it is and how it Works Chapter 2: Three Ways to Trade VIX Chapter 3: Four VIX Trading Strategies Chapter 4: VIX Trader Chapter 5: VIX Resources

Chapter 1: VIX Overview - What it is and how it Works: VIX is the Chicago Board Options Exchange (CBOE) Volatility Index and it shows the market expectation of 30 day volatility.

The VIX Index is updated on a continuous basis and offers a picture of the expected market volatility in the S&P 500 during the next 30 days.

The VIX Index was first introduced in 1993 and a second version was introduced in 2003 and is still in use today.

VIX is also commonly known as the “fear index,” since volatility and the VIX index tend to rise during times that the S&P 500 is falling. Therefore, the VIX Index is said to measure the amount of fear or complacency in the market.

Many analysts suggest that VIX is a predictive measure of market risk and future market action since this index is traded by some of the most professional traders in the world. However, there is also a large school of thought that suggests that VIX is a trailing indicator and so not suitable for attempts at market timing.

This eBook focuses on the S&P 500 VIX Index and the different ways that retail investors and traders can participate in this fast moving market.

The chart below gives a pictorial view of the VIX Index over the past ten years:

chart courtesy of stockcharts.com

From the chart we can see that VIX can make wild swings as market sentiment changes and that the average reading tends to be in the 20 range. Higher readings, typically above 30, are associated with times of intense volatility while readings in the teens represent times of stock market complacency.

In recent history, VIX reached a high during the financial crisis of 2008-2009 and then had a long period of tranquility between 2013 and 2015.

VIX uses the options in the front or second month and is always stated as a number between 0 and 100.

This number represents the anticipated % movement in both directions of the S&P 500 over the next 30 days and is constantly updated as traders change their views of market volatility.

VIX generally moves inversely to the S&P 500: The chart below shows how VIX tends to fall when the S&P 500 is climbing and rises as the S&P 500 is falling.

chart courtesy of stockcharts.com

This negative correlation is in play as much as 70-80% of the time and so can be used as a way to make directional bets on volatility which will generally decline as the S&P 500 gains in value.

VIX Futures are generally in contango: VIX futures contracts generally are in contango which means that farther out months are more expensive than closer in months or the spot price. The reverse of contango is known as “backwardation” which means that closer months are more expensive and this happens during times of intense market stress.

What this means to speculators is that the futures contracts will generally converge towards the cash price over time until expiration when they merge. So for a speculator to profit while contango is in effect, the difference between the cash price and futures price must first be overcome before a profit can be realized.

chart courtesy of CBOE Options Hub

Contango is the dominant structure of VIX while backwardation will take place during times of VIX spikes. Most of the time VIX futures trade at a premium to VIX spot price

and it’s very important to understand this structure in order to successfully trade the VIX Index.

The chart above from VIXCentral.com we can see how VIX is in backwardation during September and October and then returns to contango in the future months as the market anticipates a return to normal after a period of intense stress.

VIX will tend to be in contango 70-80% of the time and the periods of backwardation tend to be short lived and during times of intense stock market stress.

VIX is mean reverting: Another characteristic of the VIX Index is that it tends to be “mean reverting,” that is, it tends to return to an average level after extreme moves either up or down in direction.

This mean range tends to be in the 15-20 range in recent history and so this phenomenon also makes VIX trading potentially profitable for short term trading but potentially problematic for trend followers or long term investors.

The “fear” spikes tend to be very short term and severe but short lived as fear then drops and returns to its normal mean. VIX typically does not trend but rather spikes up and down around the median range.

VIX Trading Strategies: 1. VIX can be used as portfolio insurance: This strategy uses long VIX options

or VIX ETF positions to protect a stock or ETF portfolio. A long VIX position is designed to increase in value as the stock market declines and so can act as a portfolio insurance policy.

2. VIX can be used to make directional bets: Traders with nimble systems and effective risk management discipline can take advantage of the rapid moves in VIX, both up and down, away from and towards the mean, to seek profits in these fast moving markets.

VIX Trading Vehicles: 1. VIX Futures contracts: VIX Futures contracts trade electronically on the CBOE

Futures Exchange.

2. VIX Options: VIX Options started trading in 2006 and are listed on a regulated exchange.

3. VIX ETFs: VIX ETFs are offered by several major providers and offer the opportunity to trade long, short or leveraged positions related to the VIX Index.

Chapter 2: Three Ways to Trade VIX:

Three common investment vehicles exist for retail traders to participate in VIX trading.

1. VIX Futures:

VIX Futures are traded on the CBOE Futures exchange like any other futures product. To trade this market, investors are required to open a futures trading account with a commodity trading firm.

VIX Futures are a bet on implied volatility of the VIX Index and can be used as a directional bet or to hedge portfolios. They can also be used to diversify portfolios.

VIX futures contracts are standard futures contracts that settle at cash upon expiration. They track 30 day implied volatilities on a monthly basis so that a May futures contract is a forward contract saying what implied volatility will be on the expiration date of the May contract.

2. VIX Options:

VIX Options started trading in 2006 and are offered as regulated options just like an option on a stock or ETF.

VIX options can be traded within an approved brokerage account and can be used for risk management or a speculative investment.

VIX options allow investors to make a leveraged bet to buy or sell option volatility. Their pricing is based on forward VIX prices and VIX options generally move inversely to stock indexes.

VIX options can be used to hedge a stock or ETF portfolio or for directional speculation and indicate how much options traders are willing to pay for options to protect their investments during downside moves.

VIX options are traded in margin accounts just like normal options. Typically VIX options trading will require Level 2 approval from your brokerage firm to buy calls or puts.

VIX options may not track the VIX spot price well because the underlying contract is a futures contract, not the spot price of VIX. Typically a large spike in VIX will show up as a smaller move in the VIX option and vice versa for a big drop in VIX.

VIX options typically have wide bid/ask spreads and so require careful order entry.

Like regular options, VIX options that are purchased will decline in value over time and this can be accentuated by the fact that VIX is oftentimes in contango as discussed earlier in this book.

VIX Options offer several trading strategies: Long Call: A long call is a strategy for an investor who believes that volatility is going to increase which should make a call option rise in value. A long call bet is based upon a strike price and a time period, just like a normal option, but one also needs to consider the price of the underlying futures contract for the time period and its price relative to the current spot price which, if more expensive, could work against a long call position.

Long Put: A long put option position would be taken by a speculator who believes that VIX will decline and this will be affected by the strike price, time period and price of the underlying futures contract.

Spread Strategies: Various spread strategies can deployed by sophisticated options traders and these include both put and call spreads.

Selling Options Strategies: Like regular options, VIX options traders can deploy various selling strategies like selling naked calls, selling naked puts, strangles, various spreads or selling covered call options.

3. VIX ETFs:

VIX ETFs, or ETNs, as they’re more commonly called, are a relatively new way for VIX traders to gain exposure to this market within the confines of a regular brokerage account.

VIX ETNs and ETFs offer long ETNs, inverse ETNs, and leveraged ETNs and can be used to make long, short or leveraged bets on volatility. VIX ETNs also offer options trading based on the underlying instrument.

Popular VIX ETNs include: Long VIX ETNs:

• iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX): The iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX) is designed to track the S&P 500 VIX Short Term Futures Index and offers market volatility exposure through CBOE Volatility futures contracts. The index buys the first and second months of the VIX futures contract.

• ProShares VIX Short Term Futures ETF (NYSEARCA:VIXY): NYSEARCA:VIXY is designed to track the performance of the S&P 500 VIX Short Term Futures Index and invests in VIX futures contracts on the Chicago Board Options Exchange.

• iPath S&P 500 VIX Mid Term Futures ETN (NYSEARCA:VXZ): This ETN is designed to track the S&P 500 Mid Term Futures Index through futures

contracts. NYSEARCA:VXZ invests in the fourth, fifth, sixth and seventh months of the VIX futures contracts.

Inverse VIX ETNs:

• VelocityShares Daily Inverse VIX Short Term ETN (NASDAQ:XIV): NYSEARCA:XIV is designed to track the inverse of the daily performance of the S&P 500 VIX Short Term Futures Index.

• ProShares Short VIX Short Term Futures ETF (NYSEARCA:SVXY): NYSEARCA:SVXY is designed to deliver the inverse daily performance of the S&P 500 Short Term Index and uses the first two months of the VIX futures contracts.

• VelocityShares Daily Inverse VIX Medium Term ETN (NASDAQ:ZIV): NASDAQ:ZIV is designed to track the inverse daily performance of the S&P 500 Mid-term Futures Index.

Leveraged VIX ETNs:

• ProShares Ultra VIX Short Term Futures ETF (NYSEARCA:UVXY): NYSEARCA:UVXY tracks 2X the daily performance of the S&P 500 Short Term Futures Index which includes the first and second month VIX futures contracts.

• VelocityShares Daily 2X VIX Short Term ETN (NASDAQ:TVIX): NYSEARCA:TVIX is designed to generate 2X leveraged performance of the S&P 500 VIX Short Term Futures Index.

Chapter 3: Four VIX Trading Strategies: By now we’ve seen that VIX is a complicated index and that trading VIX via futures contracts, options or VIX ETNs or ETFs requires sophisticated trading and risk management strategies.

In this chapter, we’re going to discuss four VIX trading strategies that are easy to apply and can be used to trade any of these investment vehicles.

TradingGods.net focuses on trading VIX ETNs and options on VIX ETNs but these trading strategies can be used on the other forms of VIX trading as well as individual stocks, exchange traded funds or options.

VIX Trading Strategy #1: RSI (Relative Strength Index) In the chart below on the next page, we’re looking at the VIX Index and a fourteen period RSI.

RSI 14 is a default setting on many charting programs and depicts the relative strength of a particular investment vehicle.

The RSI ranges from 0 to 100 and readings above 70 are considered overbought while readings below 30 are considered oversold.

Since VIX tends to revert to the mean, we can use simple overbought and overbought indications to make trading decisions.

In the chart below we can see how VIX tends to decline after reaching levels near 70 and how it tends to rise after reaching levels near 30.

VIX Trading Strategy #1 simply looks for opportunities to short VIX at periods near RSI 70 and go long VIX at periods near or below RSI 30.

chart courtesy of stockcharts.com

VIX Trading Strategy #2: 2 Period RSI (Relative Strength Index) VIX Trading Strategy 2 Period RSI is a variation of the RSI 14 strategy mentioned above, but instead of using a 14 period RSI, this strategy simply readjusts the chart to a 2 period RSI.

This adjustment makes for much shorter term trading moves and utilizes the same concept of buying VIX when it is oversold and shorting VIX when it is overbought.

This is simply another way of saying that we’re going to buy into strength and sell into weakness.

chart courtesy of stockcharts.com

VIX Trading Strategy #3: Point and Figure Charting VIX Trading Strategy #3 relies on point and figure charting and this charting technique forms the basis for VIX Trader, the VIX trading education program developed by TradingGods.net.

chart courtesy of stockcharts.com

Point and figure charting is explained in great detail in the VIX Trader course, and you can also learn more at the Stockcharts.com chart school section.

Basically, when VIX is in a column of Xs, demand is in control and the index is going up, and when VIX is in a column of Os, supply is in control and VIX is in decline.

The blue and red lines in the chart above represent support and resistance lines and also can form the basis for trading decisions. When prices are above the blue line, the market is in a bullish configuration and when prices are below the red line, the market is in a bearish configuration.

Point and figure charts don’t have a time component and so remove the “noise” commonly seen in conventional charts. They can be scaled in a number of different ways depending upon your trading style and time frame. They also offer a clear picture of support and resistance and bullish and bearish price objectives.

Point and figure charts were used by Charles Dow long before the age of computers and remains one of the oldest forms of technical charting in use today.

VIX Trading Strategy #4: MACD (Moving Average Convergence Divergence)

MACD, Moving Average Convergence Divergence, is a widely known and widely followed technical indicator that combines a momentum and moving average methodology.

chart courtesy of stockcharts.com

It’s simple to use in that a “buy” signal is generated when the black line is above the red line and a sell signal is generated when the black line is below the red line.

Like most moving averages, there is a lag in MACD and so traders can also combine MACD with moving averages like the 50 or 200 day moving averages to determine the direction of the trend and so then just take trades that are in the direction of the prevailing medium or long term trend.

So, if price is above the 50 or 200 day moving average, depending upon your time frame, a trend trader would only take long trades generated by MACD and if price were below the moving averages, the trader would only take short trades on the index.

Chapter 4: VIX Trader:

TradingGods.net specializes in VIX trading utilizing VIX ETNs and VIX options. The site is also dedicated to VIX education and offers many articles related to VIX, VIX ETFs and VIX trading.

VIX Trader is a complete trading education program that can be used to trade VIX investment vehicles but that is also suitable for trading stocks, ETFs, options or even mutual funds.

VIX Trader expands upon the principles discussed in this book and offers you:

A complete understanding of the one VIX ETF that allows investors and traders to effectively “buy low and sell high” more than 75% of the time.

A complete introduction to the S&P 500 VIX Index, also known as “the fear index,” how it works and how VIX ETNs can offer a way to trade volatility within a traditional brokerage account or even IRA or 401k.

A complete trading system designed to compete effectively with the institutions, computer based trading programs and algorithms that have introduced so much volatility into today’s markets.

Ongoing education and training that lets you “look over our shoulders” and learn how to trade these complex and exciting markets.

An in depth trading program that you can apply to stocks, ETFs and options, along with a laser sharp focus on VIX ETFs.

There’s one ETN that totally stacks the deck in your favor, taking advantage of “contango” that allows you to essentially “buy low, sell high” under most market conditions.

This ETN has dramatically outperformed the S&P 500. From its inception on December 1, 2010, to June 30, 2015, this ETN gained 307% while the S&P 500 gained 69.1% (prices from StockCharts.com, dividends, costs, taxes not included).

Year: VIX ETN: SPX:

2011 -47.2% 0%

2012 +130.2% +13.3%

2013 +88.8% +29.6%

2014 +0.24% +11.5%

Jan-June 30, 2015 +25.9% +0.20%

Previously VIX was strictly the domain of sophisticated futures traders, but now, with the advent of VIX ETNs, retail investors can participate in this market and seek profits just like the big boys do. VIX Trader can introduce you to this ETN and offer you a system for trading it.

And here’s a closer look at another ETN that we’ve already discussed, the iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX) that is extremely popular and widely traded, averaging more than 45 million shares per day with more than $1.2 billion under management as of July, 2015.

We’ve talked about contango and how future months are normally more expensive than the current month. This means that VXX is steadily buying more expensive futures contracts, generating a negative roll yield for investors who, effectively, are buying high and selling low.

chart courtesy of stockcharts.com

This chart of NYSEARCA:VXX shows some of the long term effects of contango, but knowledgeable traders can take advantage of this action by “flipping the chart upside down” and seeking profits as NYSEARCA:VXX declines.

VIX Trader can show you how to take advantage of rising and falling volatility by using these widely traded VIX exchange traded notes.

Learn more about VIX Trader!

Chapter 5: VIX Resources: VIX and VIX trading are complicated subjects and require study to gain expertise and be successful in these markets. Fortunately, there are a number of websites dedicated to VIX and these can help accelerate your journey to becoming an expert VIX trader:

TradingGods.net

CBOE: VIX and Volatility

VIX Central

Six Figure Investing

VIX Contango

Conclusion:

In “VIX and VIX ETNs: What They’re All About and How to Trade this Exciting Market,” we’ve covered a lot of ground regarding the VIX Index and different ways for retail investors to access this complex but potentially highly lucrative arena.

We’ve discussed VIX, what it is and how it works. We’ve looked at three ways to trade VIX and four VIX trading strategies.

We’ve introduced you to the most popular VIX ETNs and offered specific trading methodologies and we’ve given you a preview of VIX Trader, a complete trading education course that focuses on VIX trading but can also be used for stocks, ETFs and options.

Finally, you have a list of free resources on the internet that can further your knowledge of this exciting and fascinating field of investing.

You’re invited to visit TradingGods.net and learn from our resources there, attend our webinars and read our articles to learn more about VIX trading and the potential this dynamic market offers. Also, take a look at our VIX Trader course!

Disclaimer: VIX Trader trading course is intended for informational, educational and research purposes only. It is not investment advice. The information, facts, figures, data and analysis included herein are believed to be accurate, reliable and credible but nothing can be verified for its certainty. The principals of TradingGods.net actively trade a wide range of Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs) and positions referenced herein may change at any time. Click here to learn about the difference between Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs). Any performance data is hypothetical and for informational purposes only. Since many potential factors including, but not limited to; market conditions, brokerage service, buying power, trading skills, stock availability will vary from trader to trader, individual results may vary. No representation is being made that any account will or should achieve profits or losses similar to any shown in any publication, article or webinar. Educational material provided by TradingGods.net does not, nor cannot take into account the needs, objectives and financial situation of its subscribers. You should consult with a qualified financial advisor before making any financial decisions. By attending or viewing any TradingGods.net information in any medium, you acknowledge, submit and adhere to this disclaimer and accept the liabilities incurred your own decisions while using our information and analysis at your own risk.

Important Disclosures and Disclaimers regarding Leveraged and Inverse ETFs:

FINRA has made the following statements concerning leveraged and inverse ETFs-

"Exchange Traded Funds (ETFs) that offer leverage or that are designed to perform inversely to the index or benchmark they track-or both-are growing in number and popularity. While such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets."

"These products are complex and can be confusing. Investors should consider seeking the advice of an investment professional who understands these products, can explain whether or how they'll fit with the individual investor's objective and who is willing to monitor the specialized ETF's performance for his or her customers."

"Leveraged and inverse ETFs can be appropriate if recommended as part of a sophisticated trading strategy that will be closely monitored by a financial professional."

Special Note: Most VIX ETNs and ETFs are not leveraged but are high volatility products and not suitable for every investor. Read the prospectus carefully and understand the risks before investing in these products.

Important Disclosures and Disclaimers regarding Options:

U.S. Government Required Disclaimer-

Options involve risk and are not suitable for all investors. Before trading options, please read Characteristics and Risks of Standardized Option (ODD) which can be obtained from your broker, by calling (888) OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, IL 60606. The content on this site is intended to be educational and/or informative in nature. No statement on this site is intended to be a recommendation or solicitation to buy or sell any security or to provide trading or investment advice. Traders and investors considering options should consult a professional tax advisor as to how taxes may affect the outcome of contemplated options transactions.

Stocks, forex, futures, and options trading is not appropriate for everyone. There is a substantial risk of loss associated with trading these markets. Losses can and will occur. No system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using this methodology or system or the information in this letter will generate profits or ensure freedom from losses.

TradingGods.net's Disclaimer applies to all material published by TradingGods.net including options, VIX and leveraged ETF information. Any trade mentioned at TradingGods.net is not advice or an order to make any purchases or sales and any trades you make are your decision alone. Please carefully read the Disclaimer, Terms of Use, and Privacy Policy at TradingGods.net before purchasing VIX Trader.