Section 1 - 

Why Trade Volatility Products?

UPDATE: As of February 21st, 2018, XIV will no longer be available to trade, as Credit Suisse has announced the
termination of the product after its 90%+ decline on February 5th, 2018. The course content remains intact as XIV
was not a vehicle for any of the trading strategies discussed in this course.

Welcome to the Volatility Trader course! You've made a fantastic decision in regards to your trading education and I
fully believe the contents in this course will change your investing experience for the better.

There's a reason our first course is on volatility products, and it's because we believe volatility products (when used
properly) can be used to fuel consistent account growth over time. Unfortunately, most people who trade volatility
ETPs have no idea how they work and they lose substantial sums of money because of it (see the update notice
above about XIV's demise).

All of that changes now.

In this course, you're going to become a master of volatility products, and every volatility trade you make going
forward will be made with an informed mind. Additionally, you'll be provided with full-blown trading plans that we've
built through extensive research. With the plans, you'll be able to follow statistically-favored trading methodologies.

In this first section, we'll discuss why anyone would want to learn how to trade volatility products.

Let's get started!

 Why Trade Volatility Products?
Before we begin with the core contents of this course, we need to talk about why anybody would want to trade
volatility products.

Since they're somewhat complicated and confusing, why not stick to trading simpler instruments such as stocks and
options on those stocks?

Opportunity & Behavior

✓ The first reason is that volatility products offer immense opportunities for account growth in both low and
high volatility markets. In addition, volatility products behave exactly like we expect them to. On the other
hand, stocks can perform "illogically" more often than we'd like. An example would when a stock's price falls after
reporting great earnings.
As we can see, NVDA beat earnings estimates by $0.25 and the stock price fell notably. Very frustrating!

Why did this happen? Well, something else related to the earnings announcement or conference call spooked
investors and caused them to part ways with their shares.

The bottom line is that the stock price movement deviated substantially from what you'd probably guess would
happen with a notable earnings beat.
 Performance Not Tied to Earnings
When trading stocks, there are often surprises that catch traders off-guard, and many times when the stock price
changes don't seem to make sense. This can lead to inconsistent or random performance in trading strategies.

Which brings us to the second reason to trade volatility products:

✓ The second reason for trading volatility products is that their performance is not determined by earnings
potential, and they do not require increases in the stock market to perform well. As an example, if the stock
market were to fall substantially, an investment in the stock market would only do well if the stock market
rebounded. On the other hand, an investment in a volatility product could do extremely well if the market stabilized,
but the market wouldn't have to recover all of the gains for the position to appreciate significantly.

In the above chart, the candlesticks represent the price changes in the E-mini S&P 500 futures (right Y-axis), and
the pink line represents the price changes in SVXY (left Y-axis).

In the highlighted period, we can see that the S&P 500 chopped around quite a bit after a sell-off. However, SVXY
gained 30-40% in that short period as the market stabilized from that sharp downside move.

As you can see, when the market rallied substantially after the highlighted period, SVXY also appreciated
immensely. The above example shows just one powerful use of volatility products in an investment portfolio.
 Overstatement of Implied Volatility Relative to Realized
Volatility
If you're primarily a short premium trader (you like to sell options), you've probably heard that selling options works
over time because implied volatility (the extrinsic value of the options) overstates the stock's realized volatility most
of the time.

With volatility products, you can trade this relationship very cleanly. We'll talk more about this in later sections, as
the discussion is detailed.

Why Trade Volatility Products?

✓ Volatility products offer incredible investment and trading opportunities in high and low volatility markets.
Additionally, the products behave exactly as we expect them to, which is something we can't always say about
stocks.

✓ Stock investments require the underlying company or market to do well. Strategies in volatility products can do
well even if the market trades sideways, increases, or even plummets.
✓ Volatility product performance is not tied to earnings, but rather the changes in VIX futures contracts.

That covers the very basics of why anyone would want to trade volatility products. Don't worry if some of the
content here didn't make sense. We're going to cover everything you need to know shortly!

To begin learning about the most common volatility products and how they work, proceed to the next
section:

Section 2 - What Do Volatility Products Track?

Alright, now that we've talked about some of the general ideas related to volatility products, it's time to introduce you
to the most common volatility instruments, and discuss what they actually track.

This section will be divided into multiple subsections:

Section Contents
1  The Most Popular Volatility ETPs

2  What Do VIX ETPs Track?

3  The VIX Term Structure

4  Convergence of VIX Futures to the VIX Index

5  Long VIX ETPs: Headed Towards $0

6  Short VIX ETPs: Long-Term Upward Drift

Let's get started!

 1 - The Most Popular Volatility ETPs
When traders talk about volatility products or VIX ETPs (Exchange-Traded Products), they are talking about a
handful of products that are tied to the performance of CBOE VIX futures contracts.

What are VIX futures? Put simply, VIX futures prices represent where the market believes the VIX Index (one-
month SPX option implied volatility) will be at the settlement date of each respective VIX futures contract. Since you
cannot invest in the VIX Index directly, futures contracts were created to give investors and traders the ability to
make trades based on their forecasts for the VIX Index.

Here's a table that outlines the most popular of these VIX ETPs:

Ticker Product Name Exposure to Volatility

VXX iPath S&P 500 VIX Short-Term Futures ETN Long

UVXY ProShares Ultra VIX Short-Term Futures ETF Long

ZIV VelocityShares Daily Inverse VIX Medium-Term ETN Short

SVXY ProShares Short VIX Short-Term Futures ETF Short

Among VIX ETPs, some have long volatility exposure and some have short volatility exposure.
As you may have noticed, the products with "Inverse" or "Short VIX" have short volatility exposure, while the
products that do not include those phrases have long volatility exposure.

But what does it mean to have long or short volatility exposure?

2 - What Do VIX ETPs Track?

The VIX ETPs were designed to give investors and traders exposure to changes in the expected implied volatility of
the S&P 500.

Why? Well, the VIX Index itself is not directly investable, so products were created in an attempt to give investors
and traders the ability to benefit from changes in the VIX Index.

As mentioned in the video from the previous section, VIX ETPs do not directly track changes in the VIX Index.
VIX ETPs track the daily percentage changes in VIX futures contracts, which are influenced by the level of
the VIX Index.

The S&P 500 VIX Short-Term Futures Index

Besides ZIV, the primary volatility products track the daily percentage change of the S&P 500 VIX Short-Term
Futures Index (ticker: SPVIXSTR). Here's the official description of this index:
The S&P 500® VIX Short-Term Futures Index utilizes prices of the next two near-term VIX® futures contracts to
replicate a position that rolls the nearest month VIX futures to the next month on a daily basis in equal fractional
amounts. This results in a constant one-month rolling long position in first and second month VIX futures contracts.

In other words, the S&P 500 VIX Short-Term Futures Index tracks a portfolio of the nearest two VIX futures
contracts with a weighted time to maturity of approximately 30 days. The result is a constant "synthetic" one-
month VIX futures contract that the VIX ETPs track on a daily basis.

ZIV uses a very similar methodology, but does not use first and second month VIX futures. With ZIV being a
"medium-term" VIX futures product, ZIV uses the 4th through 7th month VIX futures contracts. We will discuss ZIV
in later sections.

Knowing this, here's how each Short-Term VIX ETP is exposed to the S&P 500 VIX Short-Term Futures Index:

Ticke Exposure to S&P 500 VIX Short-Term

Product Name
r Futures Index

iPath S&P 500 VIX Short-Term

VXX 1x Daily Percentage Change
Futures ETN

ProShares Ultra VIX Short-Term

UVXY 1.5x* Daily Percentage Change
Futures ETF

ProShares Short VIX Short-Term

SVXY -0.5x** Daily Percentage Change
Futures ETF
*Originally 2x, but was reduced to 1.5x in February of 2018.

**Originally -1x, but was reduces to -0.5x in February of 2018.

So, if the S&P 500 VIX Short-Term Futures Index increased by 5% in a single trading day, VXX would increase by
5% and UVXY would increase by 7.5%.

On the other hand, SVXY would decrease by 2.5% since it is exposed to -0.5x the daily percentage change of the
S&P 500 VIX Short-Term Futures Index.

Ok, so you have a general idea of what the VIX ETPs are tracking, but we need to get a little more specific.

Watch the following video for an in-depth explanation of how the S&P 500 VIX Short-Term Futures Index
works:

Here are the key concepts to remember from this video:

✓ On the day of VIX settlement, VIX ETP performance is 100% weighted towards the next month's VIX future (if the
August VIX future just settled, 100% of the weighting is allocated to the September VIX future).

✓ On each trading day, the weighting shifts out of the near-term VIX future and into the next-term VIX future (per
our above example, the weighting shifts out of the August VIX future and into the September VIX future).

✓ The shift in weighting in percentage terms is equal to: (1 / Total # of Business Days in Roll Period) x 100. You
shouldn't worry too much about this. The key is understanding that VIX ETPs track a weighted basket of the first-
and second-month VIX futures.
 Simplifying VIX ETP Performance
While we've just discussed very specific details and used a bit of math, you don't need to overthink what's going on
with VIX ETPs.

The most important concept to understand is that VIX ETPs track the daily percentage change of the two
nearest-term VIX futures contracts. The portfolio of near-term VIX futures is sometimes referred to as the 30-day
synthetic VIX future.

If the front-month VIX future has close to 30 days to settlement, then you know VIX ETP performance can mostly be
described by the daily percentage changes of that VIX future.

If the front-month VIX future has near 15 days to settlement, then you know VIX ETP performance is based on an
even split (approximately) between the daily percentage changes of the first- and second-month VIX futures.

Lastly, if the front-month VIX future is approaching settlement, then you know VIX ETP performance can mostly be
described by the daily percentage changes of the second-month VIX future.
 3 - The VIX Term Structure
Ok, at this point you know that the short-term VIX ETPs track the daily percentage change of the S&P 500 VIX
Short-Term Futures Index (a mixed portfolio of the first- and second-month VIX futures with a weighted time to
maturity of approximately one month).

Now, it's time to discuss the VIX term structure, as it is a critical piece used to determine favorable and unfavorable
entry/exit points for various volatility trading strategies.

What is the VIX Term Structure?

The VIX term structure (sometimes called the "VIX futures curve") is simply the price relationship between the VIX
Index and futures contracts. 

A fantastic resource for analyzing the VIX term structure is vixcentral.com. 

Here's a quick snapshot of the VIX term structure from August 11th, 2017:
The blue dotted line represents the price of each VIX futures contract from August 2017 to March 2018. The green
dashed line represents the level of the VIX Index.

In this particular snapshot, the VIX term structure is a bit funky because the past two days have included the
beginning of a market scare from rising nuclear tensions between the U.S. and North Korea.

Typically, the VIX term structure can be observed in a steadily upward- or downward-sloping curve.
In general, there are two very distinct shapes that the VIX term structure will have at any given moment.

Most Common VIX Term Structure Shape: Contango

The most common shape you'll observe the VIX term structure in is referred to as "contango." 

✓ Contango (Upward Sloping): The prices of longer-dated VIX futures contracts are higher than the prices of
shorter-dated VIX futures contracts. The result is an upward sloping curve when plotted. In this structure, the VIX
Index is typically at a lower level than all VIX futures contracts, with the nearest-term VIX future having the closest
price to the index.
In the above image, we can see that the longer-dated VIX futures contracts are trading at higher prices than VIX
futures contracts with fewer days to settlement.

The upward-sloping curve is referred to as "contango" and typically occurs in low volatility market
environments with a low VIX Index.
Why? When the price fluctuations in the S&P 500 are minuscule (low realized volatility), traders will not pay as
much premium for S&P 500 Index options compared to when the S&P 500 is highly volatile. Lower volatility ➜ Less
demand for SPX options ➜ "Cheaper" SPX options ➜ Low VIX Index.

However, during low VIX environments, traders typically anticipate market volatility to increase at some point in the
future, with a higher probability of market volatility increasing over a longer time horizon (more uncertainty over
longer periods of time). The result is long-dated VIX futures contracts trading at a premium to short-dated contracts.
Similarly, if you look at the implied volatility of each SPX options expiration cycle, you'll typically see higher implied
volatilities in the longer-term expiration cycles.

Less Common VIX Term Structure Shape: Backwardation

Opposite of contango, a state of "backwardation" refers to a downward-sloping VIX term structure, in which shorter-
dated VIX futures contracts are more expensive than longer-dated VIX futures. The VIX Index is typically at a
significant premium to all VIX futures contracts in this structure, with the nearest-term VIX future trading at a price
closest to the VIX Index.

✓ Backwardation (Downward-Sloping): The prices of longer-dated VIX futures contracts are cheaper than the

prices of shorter-dated VIX futures contracts. The result is an downward-sloping curve when plotted.
In the above image, we can see that the nearest-term VIX futures contract is trading for $25.125, while the longer-
dated VIX futures contracts are closer to $20. At the time, the VIX Index was around 40.

Backwardation in the VIX term structure occurs during periods of highly volatile movements in the S&P 500.
Why? Market participants typically do not expect periods of extreme volatility to last long. The market is typically
quiet with the occasional bout of extreme volatility. As a result, longer-term VIX futures contracts typically trade at a
discount to near-term VIX futures contracts because market participants expect volatility to return to more "normal"
levels in time.

You may be wondering why understanding contango and backwardation are important to trading volatility ETPs. In
the next section, we'll examine why contango and backwardation in the VIX term structure is important for the
performance of volatility products.
VIX Term Structure
✓ The VIX term structure represents the relationship between the prices of VIX futures at varying maturities.

✓ In calm market periods with the VIX Index at lower levels (below 17.5, for example), longer-dated VIX futures
typically trade at a premium to shorter-dated VIX futures contracts. The result is an upward-sloping or "contango"
VIX term structure.

✓ In more volatile market periods with the VIX Index at higher levels (25+), longer-dated VIX futures typically trade
at a discount to shorter-dated VIX futures contracts. The result is a downward-sloping or "backwardated" VIX term
structure.

4 - Convergence of VIX Futures to the VIX

Index
Perhaps the most important concept to know is that VIX futures prices will converge towards the VIX Index as time
passes.
Why? Expiring VIX futures contracts receive their final settlement value via a VIX-style calculation on the morning of
VIX settlement. Knowing that a VIX future's settlement value will be very close to the VIX Index value on the day of
settlement, natural buying and selling activity will bring the contract's value closer and closer to the VIX Index as
time passes.

Example: VIX Futures & VIX Index Convergence

Let's look at two VIX term structure snapshots from June of 2017 to demonstrate the concept of convergence:
On June 1st, 2017, the June VIX future was trading at $11.63 with 19 days to settlement. At the time, the VIX Index
was at 9.89. In theory, if the VIX Index were to remain at 9.89 over the following 19 days, the June VIX future should
fall from 11.63 to a value much closer to 9.89.

What really happened? Fast-forward to June 20th, and we observe the following VIX term structure:
As we can see, the June VIX future's value only fell to 11.13, as the VIX Index rose from 9.89 to 10.89 over the
period.

The important takeaway here is that the price difference between the VIX Index and June VIX future shrunk
significantly as the future approached settlement:

Date VIX Index June VIX Future June VIX Future - VIX Index

June 1st, 2017 9.89 11.63 (19 DTS*) +1.74

June 20th, 2017 10.89 11.13 (0 DTS*) +0.24

*Days to Settlement

You may be wondering why the June VIX future was not trading at the exact VIX Index level.

The answer is that these prices are from the Tuesday market close before the Wednesday morning VIX settlement.
After a VIX future ceases trading on Tuesday before settlement, the contract can no longer be traded before it
receives its final settlement value shortly after the opening bell on Wednesday morning.

So, the 0.24 premium of the VIX future to the VIX Index in the above example represents some overnight risk
premium (the market's potential to open lower the next day, causing an increase in SPX option premium/VIX Index,
and therefore a higher settlement value for the June VIX future).
VIX Futures Convergence: Implications for Volatility Product
Performance
What do VIX futures converging towards the VIX Index have to do with trading volatility products?

Here's how:

✓ During sustained periods of VIX futures contango, VIX futures steadily lose value as time passes and each
contract converges towards the lower VIX Index.
As a result, long volatility products (VXX, UVXY) also lose value, as they track the daily percentage changes in the
near-term VIX futures. Conversely, short volatility products (SVXY, ZIV) steadily appreciate in value, as they track
the inverse of the daily percentage changes in near-term (SVXY) and medium-term (ZIV) VIX futures contracts.

The downside price pressure observed in futures contracts as they converge towards a lower spot price (the current
price of the product the futures reference) is sometimes referred to as "negative roll-yield."
VIX Futures Convergence: Backwardation
✓ During sustained periods of VIX futures backwardation, VIX futures steadily gain value as time passes and each
contract converges towards the higher VIX Index.
As a result, long volatility products (VXX, UVXY) appreciate, as they track the daily percentage changes in the near-
term VIX futures. On the other hand, short volatility products (SVXY, ZIV) steadily lose value, as they track the
inverse of the daily percentage changes in near-term (SVXY) and medium-term (ZIV) VIX futures contracts.

The upward price pressure observed in futures contracts as they appreciate to a higher spot price is sometimes
referred to as "positive roll-yield."

In the next sections, we'll talk about how the common VIX term structure shapes and convergence of VIX futures to
the VIX Index have translated to gains and losses in common volatility ETPs over time (and how you can take
advantage).
VIX Futures & Index Convergence
✓ VIX futures contracts settle to a VIX-style calculation on the morning of VIX settlement. As a result, VIX futures
prices trade closer and closer to the VIX Index as their settlement date approaches.

✓ When the VIX term structure is in contango, VIX futures contracts depreciate over time as they converge towards
the lower VIX Index (negative roll-yield). During sustained periods of contango, long VIX ETPs are likely to lose
substantial value, while short VIX ETPs can increase exponentially.

✓ When the VIX term structure is in backwardation, VIX futures contracts appreciate over time as they converge
towards the higher VIX Index (positive roll-yield). During sustained periods of backwardation, long VIX ETPs may
increase exponentially, while short VIX ETPs are likely to lose significant value.
 5 - Long VIX ETPs: Headed Towards $0
In the previous section, you learned that VIX futures contracts converge towards the VIX Index as time passes, as
VIX futures receive their final settlement value from a VIX-style calculation on the morning of VIX settlement.

In this section, we'll examine how long VIX products (VXX and UVXY) have performed since they were introduced
(2009 for VXX and 2011 for UVXY).

First, let's look at a brief history of the VIX term structure.

VIX Term Structure History

To quickly understand the recent history of the VIX term structure, we'll look at a chart of the price relationship
between the first- and second-month VIX futures from late 2011 to present:
F1-F2 Contango = (Second-Month VIX Future / First-Month VIX Future) - 1

The line on this chart represents the premium or discount of the second-month VIX future (F2) to the first-month VIX
future (F1). Any positive percentages indicate that the second-month VIX future was at a premium to the first-month
VIX future, which is an indication of a VIX term structure in contango. Conversely, any negative percentages
indicate that the second-month future was at a discount to the first-month future, which indicates backwardation.
Clearly, there have only been a handful of times (since 2010-11) in which the VIX futures curve has been in
backwardation, which means a large majority of the time the VIX futures are in contango.

As you know, VIX futures lose value over time when in contango, as the VIX Index is typically at a discount to the
near-term VIX futures when contango is present.

How has the dominant contango structure impacted volatility product performance in recent years?

VXX & UVXY Performance Since Inception

In this section, we'll examine how long VIX products (VXX and UVXY) have performed since they were introduced
(2009 for VXX and 2011 for UVXY).

First, let's look at the price performance of VXX since its inception in January of 2009:
Similarly, UVXY has suffered a similar fate since its inception in 2011:
Both VXX and UVXY have undergone numerous reverse splits to keep their prices from reaching $0. When
calculating each product's split-adjusted price at the time of inception, we get the following:
 Product Split-Adjusted Closing Price: First Trading Day* Current Price* % Return

VXX N/A** $20.46 -99.99%

UVXY $205,800,000 (Oct. 4, 2011) $20.60 -99.99%

*as of October 24th, 2019. **Cannot calculate accurate VXX split-adjusted inception price since the original VXX
matured, VXXB was introduced and renamed to VXX. The % return is essentially the same as UVXY.

As we can see, both VXX and UVXY have lost virtually all of their value since being launched. To put the
performance in perspective, a $205,800,000 investment in UVXY in 2011 would be worth just $20.60 as of October
2019.

Hopefully, this exercise has shown you that long-term investments in long volatility products such as VXX or UVXY
are not likely to do well, with a higher probability of going "bankrupt" over longer time horizons.

Be sure to watch the following video for an in-depth discussion related to what you just learned:

Why Long VIX ETPs Are Mathematically Doomed

If the previous section wasn't enough, I want to go through a simple mathematical exercise to explain why long-
term investments in long volatility products are almost guaranteed to lose money.

For this demonstration, we'll use VXX, which tracks that daily percentage change in the one-month synthetic VIX
future.
Now, consider a 5-month period in which the VIX term structure is in contango, and that the contango leads to a
10% decline in VXX each month:

Month Monthly Return VXX Price

0 - $100

1 -10% $90

2 -10% $81

3 -10% $72.90

4 -10% $65.61

5 -10% $59.05

Clearly, frequent negative percentage returns lead to a steady decay in the value of VXX. However, since daily VXX
performance is determined by the daily percentage return of the one-month synthetic VIX future, a surge in volatility
means different things depending on when it happens.

For example, let's say the market tanks and the one-month synthetic VIX future surges 30% in a single day. With a
30% one-day increase in the 30-day synthetic, VXX would also increase by 30%. Let's see what that would mean
for VXX depending on when the volatility increase occurred:
 Month Monthly Return VXX Price VXX Value After 30% One-Day Vol Spike*

0 - $100 $130

1 -10% $90 $117

2 -10% $81 $105.30

3 -10% $72.90 $94.77

4 -10% $65.61 $85.29

5 -10% $59.05 $76.77

*a one-day, 30% increase in the one-month synthetic VIX future (the portfolio of first- and second-month VIX futures
with a weighted time to maturity of 30 days).

As we can see, the best-case scenario is that a trader buys VXX immediately before a spike in volatility. In
that scenario, the trader doesn't lose money from the price decay of VIX futures as they slowly converge towards
the lower VIX Index.

However, what if the trader buys VXX for $100/share and waits two months before that 30% volatility spike occurs?
Assuming a 10% loss on VXX shares per month from the steady decay in VIX futures, the 30% volatility increase
only lifts the shares to $105.30, representing a $5.30/share gain on the position.
Finally, what if the trader waits five months for the 30% volatility increase? Assuming a 10% loss per month from
persistent contango in the VIX futures, the 30% volatility increase only brings VXX shares to $76.77, in which case
the trader still has losses of $23.23/share, despite the significant increase in volatility.

Long VIX ETPs

✓ Since UVXY was launched, the product has lost virtually 100% of its value because of the contango-dominant
VIX term structure (resulting in steadily-decaying VIX futures each month).

✓ When buying long volatility products, timing is essential. When contango is present, long-term investments in long
volatility products are almost guaranteed to lose money.
 6 - Short VIX ETPs: Upward Drift
In the previous section, you learned about the unfortunate history of long VIX ETPs. Since the VIX term structure is
typically in contango, long VIX ETPs experience a slow bleed over time.

Since short VIX ETPs track the inverse of the daily percentage changes of the 30-day synthetic VIX future, does
that mean short VIX products steadily rise in value?

The historical answer is yes, but not without their fair share of significant drawdowns along the way.

With long VIX ETPs such as VXX and UVXY, the typical trend is downwards with the occasional spike higher. With
short VIX ETPs like SVXY, the typical trend is upwards with the occasional catastrophic drawdown. The
steady upward drift typically observed in SVXY leads some investors to deem the product as a sound buy-and-hold
investment.

After this section, hopefully, you understand why that might not be such a good idea (if you haven't figured it out
already).

To gain a better understanding of inverse/short volatility product performance, let's take a look at the performance of
XIV and SVXY since they were launched (2010 and 2011, respectively).

XIV and SVXY Performance Since Inception

Let's look at a chart of XIV and SVXY since the products were introduced:
In the above chart, the candlesticks represent the price fluctuations of XIV, while the blue line represents the price
of SVXY. The two products both track the inverse of the daily percentage return of the 30-day synthetic VIX future,
so both products are nearly one in the same.

As we can see, since being launched, both products experienced an astronomical increase before realizing a one-
day drawdown greater than 90%. The cause of the collapse was a severe one-day decline in the S&P 500, which
occurred after one of the lowest volatility years since the 1960s.

Obviously, buy-and-hold investments in these products with a large percentage of investment capital is not a safe
long-term strategy. In fact, the one-day decrease over 90% caused Credit Suisse, the issuing company of XIV, to
terminate the product per an 'Acceleration Event' outlined in the XIV prospectus.

In short, Credit Suisse mentioned an 80%+ decline in a single day is an event that they would consider as grounds
for terminating the product, as such volatility makes rebalancing and tracking efforts much more difficult. On
February 5th, 2018, XIV and SVXY did suffer 90%+ single-day losses, and XIV was terminated. 

XIV's Termination in 2018

This course was initially launched in late 2017, but in 2018 something disastrous happened in the inverse volatility
universe. On February 5th, 2018, the S&P 500 fell violently, which was completely unexpected since the entire year
of 2017 was the least volatile stock market year since the 1960s. Here's what 2017 and early 2018 looked like:
2017 was a year filled with many up-days and very few down-days, especially notable down-days. In 2018, the
market started the year off with a 0.50% increase almost every single day.

Unfortunately, the party ended with a few extremely violent downward movements. With the VIX Index and futures
depressed to incredibly low levels from 2017 and early 2018, the percentage increases in the near-term VIX futures
were substantial. Here's how the front-month and back-month VIX futures reacted:
Front-Month VIX Future:
Back-Month VIX Future:
As we can see, the front-month VIX future (February 2018 VIX Future) increased over 100% while the back-month
VIX future (March 2018 VIX future) increased almost 90%.

Since XIV and SVXY track the inverse of the daily percentage change of the basket of first- and second-month VIX
futures, it makes sense that XIV and SVXY declined 90%+.

In the XIV prospectus, an 'Acceleration Event', or market event that may lead Credit Suisse to terminate XIV, was
stated as a one-day decrease greater than 80%. On February 5th, 2018, XIV lost more than 80% in a single day,
and Credit Suisse made the announcement that XIV would be terminated.

SVXY did not have the same acceleration event outlined in the prospectus, and continues to trade as normal. Some
speculate that the reason SVXY is still around is because it's an ETF, whereas XIV was an ETN. However, it's been
speculated that SVXY's ETF structure is not the reason it was not terminated.

Just like XIV, SVXY's issuer has the right to terminate the product at any time, but for now it remains trading as
normal.
With XIV being the most actively traded inverse volatility product, SVXY will likely absorb the liquidity that XIV
leaves behind, as SVXY is now the only inverse volatility product that tracks the same thing as XIV. Additionally,
SVXY has tradable options, which should become much more liquid going forward.

Nobody expected XIV's termination would actually occur (at least in the short-term), but the fact it happened so
soon after it's best-performing years should serve as an important lesson to all investors and traders: never rule
out highly unlikely and disastrous trading outcomes.

And, more importantly, understand the risks of your investments and trades. Sadly, many investors in XIV lost
everything, as they put all of their eggs in one basket (XIV) without fully understanding the product's intricacies.

Changes to Volatility Product Leverage

In response to the massive volatility product shock that happened in early February of 2018, ProShares announced
on February 26th that two of their products, SVXY and UVXY would begin trading with reduced leverage.

With SVXY originally tracking -1x the daily percentage move in the near-term VIX futures, the tracking leverage was
reduced to -0.5x.

With UVXY originally tracking 2x the daily percentage move in the near-term VIX Futures, the tracking leverage was
reduced to 1.5x.

The changes will lead to less volatility in both of these products going forward.
Short VIX ETPs
✓ Since volatility products have been launched, the market has been in a bullish period with VIX futures in contango
almost the entire time. As a result, short VIX ETPs (XIV and SVXY) experienced exponential increases.

✓ Even though buying and holding short VIX ETPs has been an incredibly profitable strategy in recent years, these
products do experience the occasional catastrophic drawdown (75%+). During a prolonged period of VIX futures
backwardation, XIV and SVXY have the potential to lose nearly all of their value (90%+). Note: This bullet was
initially written in late 2017, before the collapse of XIV and SVXY.

✓ On February 5th, 2018, the S&P 500 fell approximately 5%, and the near-term VIX futures exploded higher. The
result was a 90%+ decline in XIV and SVXY in a single trading day. XIV was terminated and ceased trading on
February 20th, 2018.

Very nice! You've just learned the most important concepts related to the mechanics of volatility products.

Now, it's time to talk about how to analyze the VIX term structure to spot favorable and unfavorable environments
for volatility trading strategies.
 Section 3 - Analyzing the VIX Term Structure

Congratulations on making it this far! We've covered a ton of fairly complicated content, and I hope you've learned a
great deal about volatility products.

In this next section, we're going to start discussing how to analyze the VIX term structure to identify potentially
favorable and unfavorable environments for long and short volatility products.

Additionally, you'll learn about the "danger zone" for short volatility products like SVXY.

Within this section of the course, there are four subsections:

Section Contents
1  Contango % Analysis

2  VIX ETP Performance: Contango % vs. Curve Shifts

3  VIX Term Structure "Boundaries"

4  What Causes Changes in the VIX Term Structure?

 1 - Contango Percentage Analysis
In the previous section, you learned the general idea of contango and backwardation in the VIX term structure, and
how those environments serve as a benefit or detriment to long and short volatility products.

Now, we're going to dive a bit deeper and discuss the degree of contango and backwardation, and how it can serve
as an indicator of potential volatility product performance.

Roll-Yield Basics
When discussing VIX futures, the term "roll-yield" describes what an investor will gain or lose as their futures
contract converges towards the spot price. In the context of the VIX futures market, the "spot price" is the VIX Index.

In a contango market (futures at a premium to the spot price), there is said to be a negative roll-yield because
futures contracts lose value as they converge towards the lower spot price (generating losses for long futures
traders and profits for short futures traders).

In a backwardated market (futures at a discount to the spot price), there is said to be a positive roll-yield because
the futures contracts gain value as they converge towards the higher spot price (generating profits for long futures
traders and losses for short futures traders).
 Contango Percentage & VIX ETPs
When volatility traders talk about contango percentage, they are typically referring to the percentage premium or
discount between the first- and second-month VIX futures.

As we move forward, we will use the term "contango percentage" instead of roll-yield, as they are different things.

Let's look at an example using a snapshot of the VIX term structure from VIX Central:
In the above image, we can see that the second-month VIX future (October) is trading 14.24, while the first-month
VIX future (September) is trading 13.56.
As a result, the contango percentage is said to be 5.01%, which we can see based on the "% Contango" between 1
and 2 below the chart above.

Why is Contango Percentage Important?

Contango Percentage is important to consider before making any trades in volatility ETPs because it tells you how
"steep" the current contango or backwardation is.

Let's take a look at two different VIX futures curves and discuss the implications for VIX ETP performance.

Minor Contango
In this first VIX term structure snapshot, the contango is not very steep:
In this example, the second-month VIX future is at a 2.10% premium to the first-month VIX future, while the third-
month VIX future is at a 3.09% premium to the second-month VIX future.
In a world where the VIX Index and shape of this curve stay the same as time passes, the near-term VIX futures
would not likely lose much value. More specifically, we might expect the second-month VIX future to lose about 2%
of value as it converged lower towards the front-month VIX future.

As a result of very minimal decay in the near-term futures, volatility ETPs would not likely experience significant
changes (barring any "curve shifts," which we'll discuss in the next section).

Steep Contango
Now, let's take a look at a much steeper VIX term structure:
With the second-month VIX future at a 10.99% premium to the front-month VIX future, and the third-month VIX
future at a 5.94% premium to the second-month VIX future, contango is much steeper compared to the previous
example.
With larger premiums between near-term VIX futures, we would expect these futures to experience much more
significant decay as time passes, assuming the VIX Index remains at or below its level at the time.

With significant decay potential in near-term futures, long volatility products may suffer large losses while short
volatility products may experience substantial gains.

Using Contango Percentage to Your Benefit

In this section, we've discussed the basics of "contango percentage" and how it applies to the VIX term structure.
While we didn't cover minor or steep backwardation, the concepts from the contango examples carry over.

In short, here are some guidelines for analyzing contango percentage and how the varying degrees of
contango/backwardation impact volatility ETPs:

✓ Minor Contango (0-5% Contango): With a "flatter" contango VIX term structure and insignificant contango
percentage, long VIX ETPs such as VXX and UVXY should experience very minimal price decay. Conversely, short
VIX ETPs such as SVXY should experience minor price appreciation.*

✓ Steep Contango (5-10%+ Contango): A VIX term structure with significant contango percentage suggests that
long VIX ETPs such as VXX and UVXY may experience substantial price decay as time passes. Conversely, short
VIX ETPs such as SVXY should experience notable price appreciation as time passes.*
✓ Minor Backwardation (0 to 5% Backwardation): When the VIX term structure is in a minor state of
backwardation, long VIX ETPs should experience small amounts of price appreciation as time passes. On the other
hand, short VIX ETPs such as SVXY should experience minor price depreciation as time passes.*

✓ Steep Backwardation (5-10%+ Backwardation): When the VIX term structure is in a state of steep

backwardation, long VIX ETPs should experience exponential price appreciation as time passes. On the other hand,
short VIX ETPs such as SVXY should experience severe depreciation as time passes.*

*These statements are made with the assumption that the degree of contango/backwardation remains consistent
over a period of time, with the VIX Index not experiencing any significant changes over that period. 

Of course, the above statements are merely guidelines and are meant to help you think about how the degree of
contango/backwardation can be used to make educated guesses about the future price performance of long and
short VIX ETPs.

In the real world, the degree of contango/backwardation is always changing, as the VIX Index and VIX futures
fluctuate on a daily basis.

In the next section, we'll build on contango percentage by also discussing "curve shifts" as a driver of VIX ETP
returns.
Contango Percentage Analysis
✓ "Roll-yield" refers to the gains or losses on futures positions as those futures contracts converge towards the spot
price (current price of the product or asset the futures are associated with).

✓ In the context of the VIX futures market and volatility trading, traders turn to "contango percentage," which is
commonly used to describe the premium/discount of the second-month VIX futures to the first-month VIX futures.

✓ When contango percentage is high and positive (steep contango), near-term VIX futures are likely to experience
more significant price decay as time passes, leading to large losses in long volatility products VXX and UVXY.
Conversely, short volatility products like SVXY benefit from sustained periods of high/steep contango.

✓ When contango percentage is significantly negative (steep backwardation), near-term VIX futures are likely to
experience more significant price appreciation as time passes, leading to large gains in long volatility products VXX
and UVXY. Conversely, short volatility products like SVXY suffer immensely from sustained periods of negative
contango percentage (which means significant backwardation is present).

Update 2019: In addition to the percentage relationship between the first-month and second-month VIX futures, the relationship
of the "30-day synthetic VIX future" to the VIX Index is also important, as it tells us how much the 30-day synthetic VIX future has
to fall before reaching the VIX Index.

Since volatility products track the 30-day synthetic VIX future, a bigger difference between the two gives us an indication as to
how much pressure is on the volatility products if no change in the volatility term structure occurs.

There is a handy website that can be used to easily track the relationship between these two things:

http://www.tradingvolatility.net/p/datasourceurldocs.html
On the bottom left of the boxed region, we can see the VXX weights. These percentages are the weightings used to
calculate the 30-day VIX future, which is referred to as the "Weighted M(1&2)" in the bottom right of the boxed
region.

Based on these figures, VXX's performance on this trading day will be equal to the percentage changes in the
November and December VIX futures contracts, multiplied by their respective weightings.

In this instance, the 30-day synthetic VIX future or Weighted M(1&2) is calculated to be 16.28, which is the
November contract price multiplied by its weighting of 76%, plus the December contract price multiplied by its
weighting of 24%.

On the bottom right of the boxed region, we see M(1&2) to VIX, which is 20.62%.

This percentage tells us that the 30-day synthetic VIX future, which the volatility products are tracking on a daily
basis, is trading at a 20.62% premium to the VIX Index.

A 20%+ premium to the VIX Index is significant, as it means long volatility products such as VXX and UVXY face
heavy downside pressure if time passes with no increase in market volatility (and therefore the VIX Index).

As time passes with no increase in market volatility, the VIX futures will decay towards the lower VIX Index, and
since they're at such a significant premium to the VIX Index, they'll lose a lot as they decay towards the VIX. As a
result, VXX and UVXY will lose substantial value as well.

It's hard to predict exactly how much VXX and UVXY will lose in a given week or month, but all that we need to
know is that a more significant premium of the 30-day synthetic VIX future to the VIX Index means more downside
pressure for VXX and UVXY.
 2 - Contango % vs. "Curve Shifts"

In the previous section, we talked about how contango percentage can help you gauge the degree of
contango/backwardation in the VIX term structure, and how that can translate to future performance in VIX ETPs
(assuming the degree of contango/backwardation remained fairly consistent).

As you know, nothing is constant in our world and markets change on a daily basis. The VIX Index and futures
fluctuate on a daily basis in response to the changes in the value of the S&P 500. Additionally, VIX products can
be very sensitive to geopolitical events.

As a result, we cannot only look to contango percentage as a predictor of potential VIX ETP returns, but we must
also consider potential "curve shifts."

What is a Curve Shift?

We will use the term "curve shift" to describe a broad change in the VIX futures curve (the VIX term structure).

Whenever you see a significant short-term movement in one of the VIX ETPs, it's likely because there was a
substantial shift in the VIX futures curve.

Let's look at some examples.

 SVXY Doubles in ~6 Months
A great example of a significant curve shift that led to one of the most explosive increases in SVXY (a short volatility
product) happened just after the U.S. Presidential Election of 2016:
Please Note: SVXY now has a 0.50x multiplier, which means it moves 50% of the daily near-term VIX futures
returns. It would not experience the same increase seen in this chart in the same environment in the future.

As we can see, SVXY doubled in just over 6 months (November 2016 to June 2017). The reason for the increase
was a collapsing VIX Index followed by a sustained period of ultra-low volatility with significant contango in the VIX
futures.

Here's what happened to VXX:

What happened during this period? Well, let's look at the VIX futures curve on November 4th, 2016:
On November 4th, 2016, the VIX Index and futures were at the following levels:

VIX Index: 22.51

November VIX Future: 19.33

December VIX Future: 18.98

The longer-term VIX futures contracts were closer to 20.

Fast-forward to June 23rd, 2017, and we observed the following VIX futures curve:
As we can see, the VIX Index and futures fell to the following levels:

VIX Index: 10.02

July VIX Future: 11.88

August VIX Future: 12.63

As a result of the collapse in the VIX Index (and overall market fear) over the period, the entire VIX futures curve
shifted significantly lower, with the two nearest-term VIX futures at 11.88 and 12.63, respectively.

Here's a visualization of the curve shift in one chart:

In addition to the substantial shift lower in the VIX futures curve, contango percentage (premium between first- and
second-month VIX futures) was also above 10% for most of the period (translating to significant price decay of VIX
futures contracts over the period):
In this case, a significant shift lower in the VIX futures curve in addition to incredibly steep contango over a three -
month period led to exponential gains in short VIX ETPs, and devastating losses in long VIX ETPs.

Be sure to view the following video to solidify your learnings with an in-depth explanation of VIX futures
curve shifts (and how they drive performance in volatility products):

Contango Percentage vs. Curve Shifts

✓ While contango percentage can give you an idea as to how volatility ETPs may perform into the future (if the
contango percentage remains relatively consistent), contango percentage is just one piece to the puzzle.

✓ Explosive movements in volatility ETPs can often be linked to "curve shifts," which describe large changes in
near-term and sometimes long-term VIX futures prices.

✓ When significant contango percentage is combined with a substantial curve shift, volatility ETPs typically
experience extreme price changes.
 3 - VIX Term Structure "Boundaries"
Now that you know the recipe for explosive movements in volatility ETPs, we need to briefly talk about the
"boundaries" or extremes of the VIX term structure.

Why? Well, if you're interested in placing a short volatility trade (through bearish VXX or UVXY strategies, or bullish
SVXY strategies), it would be ideal for the VIX term structure to have some room to shift lower.

Conversely, if you're interesting in trading a long volatility strategy (long VXX or UVXY, short SVXY), then it would
be ideal for the VIX term structure to have room to shift higher.

If the VIX futures curve doesn't have much room to shift in your favor, then the profitability of the strategy hinges on
contango percentage remaining in your favor and the VIX Index not moving swiftly against you.

If this doesn't make sense, don't worry. We're about to walk through examples so you understand exactly what I'm
talking about.

VIX Term Structure Extremes

Let's take a look at a chart featuring two extremes of the VIX term structure that we've observed over the past 10
years:
While there are no limits as to how high or low the VIX term structure can go, the above chart shows some of the
historical extremes.

For example, at the height of the VIX extreme in 2008 (the day the VIX approached 90), near-term VIX futures
closed the trading day at 55.82 and 43.56, respectively. Furthermore, longer-term VIX futures were between 35 and
40.
On the other hand, with the VIX at sub-10 levels in 2017, near-term VIX futures closed the day at 11.28 and 12.63,
respectively. In addition, longer-term VIX futures traded below 17.

Watch this video for an in-depth discussion of VIX futures "boundaries" and why they're important when
trading volatility products:

Shorting Volatility With a Low VIX Term Structure

When analyzing the VIX term structure, I'd argue it's more important to analyze the VIX futures before shorting
volatility products as opposed to buying volatility products. The reason is because there's almost always going to be
room for increases in volatility because the market is typically in a medium-to-low volatility environment.

Let's take a look at a historical snapshot of the VIX term structure:

If a trader were to look at the degree of contango alone, then a short volatility strategy would look attractive because
there's 12% of contango between the front two VIX futures contracts and 6.34% of contango between the second
and third VIX futures contracts.

Additionally, the two nearest VIX futures contracts are at substantial premiums to the VIX Index.

With such significant contango and premiums of the VIX futures to the VIX Index, short volatility products such as
SVXY have the potential to appreciate if the VIX Index remains near current levels.
A trader who initiates a short volatility strategy in such an environment (VIX near record lows and the near-term VIX
futures all below 15) is making a bet that the VIX Index will remain low into the near future.

If it does, then they will profit from SVXY increases as near-term futures decay towards the lower VIX Index. 

However, if the VIX Index makes an explosive move higher, SVXY may face catastrophic losses, as a volatility
spike that originates from a low VIX level means the percentage increase is significant (translating to a large
percentage decrease in XIV and SVXY). UPDATE: On February 5th, 2018, such an increase occurred and XIV was
terminated by Credit Suisse as a result of the 90%+ single-day loss of value.

Remember: It's All About Daily Percentage Changes

As you know, VIX ETPs track the daily percentage performance of the 30-day synthetic VIX future (the S&P 500
VIX Short-Term Futures Index: a portfolio of the nearest-two VIX futures contracts).

If the 30-day synthetic VIX future were to increase from 10 to 15 in a single trading day, that would represent a 50%
increase. Here's how the VIX ETPs would perform that day:

VXX: +50%

UVXY: +75%

SVXY: -25%
Now, if the 30-day synthetic VIX future increased from 15 to 20 in a single day, that same 5-point rise would
represent a 33% increase from the starting point. Here's how the VIX ETPs would perform that day:

VXX: +33%

UVXY: +49.5%

SVXY: -16.5%

So, always keep in mind that the starting point of a shift in volatility has important implications for potential VIX ETP
performance. Furthermore, the biggest risk to short volatility products (XIV and SVXY) is a massive volatility spike
that starts from low VIX Index/futures levels.
VIX Term Structure Extremes
✓ Significant shifts in the entire VIX term structure combined with significant contango percentage (high degrees of
contango/backwardation) are what cause explosive movements in VIX ETPs.

✓ When looking to place short volatility trades (bearish VXX or UVXY, bullish SVXY), it is favorable for the VIX term
structure to have room to move lower. Otherwise, the profitability of short volatility trades hinges on the VIX Index
remaining low as near-term VIX futures decay towards the VIX Index.

✓ When looking to place long volatility trades (bullish VXX or UVXY, bearish SVXY), it is favorable for the VIX term
structure to have room to move higher. Otherwise, the profitability of long volatility trades hinges on the VIX Index
remaining elevated as near-term VIX futures appreciate towards the VIX Index.

✓ Of the two scenarios discussed above, shorting volatility with a low VIX term structure is the more likely "problem"
volatility traders will encounter, as the VIX term structure will typically always have room to move higher under
normal market conditions.
 4 - What Causes the VIX Term Structure to
Shift?
The final piece to the volatility trading puzzle that we need to discuss is what causes shifts in the VIX Index and,
consequently, the VIX term structure.

When trading volatility products, we have to make forecasts related to future price changes (or lack thereof) of the
VIX Index and near-term futures.

As a result, it's crucial to understand what can cause significant changes in volatility.

VIX Influencer #1: Realized Volatility

Perhaps the greatest long-term influence on the VIX Index and futures is the realized volatility of the S&P 500.

By realized volatility, I simply mean the magnitude of price fluctuations observed in the S&P 500.

Traders commonly look to "Historical Volatility" metrics to quickly analyze the magnitude of past price
fluctuations in the S&P 500. Common time frames used are 20 trading days (one month) and 60 trading days
(three months).

To get the 20-day historical volatility, the standard deviation of the daily returns over the past 20 trading days is
calculated and then annualized. The formula looks like this:
For example, if the standard deviation of returns over the past 20 trading days was 1%, then the 20-day historical
volatility would be:

1% x SQRT(252) = 15.87% 20-Day Historical Volatility

Why does this matter?

Implied Volatility vs. Historical Volatility

The VIX Index is a forward-looking indicator that expresses the market's expectations for S&P 500 price changes in
the future (which are implied by the prices of one-month SPX options). Historical volatility (HV) looks at past price
returns and expresses those movements in annualized terms. 

Before moving further, let's take a look at the S&P 500, VIX Index, one-month HV and three-month HV from 2012 to
late 2017:
By taking a quick glance at the above chart, we learn a few things:

✓ Implied volatility (the VIX Index) is typically at a premium to realized market volatility (historical volatility). In other
words, SPX option prices are typically priced at a premium relative to the market's future movements.

✓ In addition, we can observe how a decrease in realized volatility (smaller and smaller price fluctuations) "pulls" the
VIX Index lower (clear when analyzing three-month HV and the VIX from 2016 to late 2017). On the other hand,
increases in realized volatility translate to higher VIX Index (one-month SPX option) prices.

✓ Significant increases in implied volatility (the VIX) are typically caused by substantial market decreases (with late
2015 being the clearest example). While strong market increases should theoretically result in an increase in
implied volatility (since volatility works both ways--up and down), we typically observe falling implied volatility when
the market rises, especially over multiple weeks/months without any large drawdowns (late 2016 to 2017).

If this doesn't make sense quite yet, here's a very simple way to think about why realized/historical volatility matters:

✓ When the market is more volatile (larger price fluctuations), traders are willing to pay more premium for options (in
the case of the S&P 500, an increase in option prices = higher VIX Index).

✓ When the market is less volatile (smaller price fluctuations), traders are not willing to pay high premiums for
options (in the case of the S&P 500, cheaper option prices = lower VIX Index).
Think about it: if a $100 stock was fluctuating ±$3 per day, would you be willing to pay $5 for a 30-day at-the-money
option on that stock? You might, as the volatility in that stock could result in your option ending up significantly in-
the-money (more valuable) by the time it expires in one month.

Now, what if that $100 stock was only fluctuating ±$0.50 per day, would you be willing to pay $5 for a 30-day at-the-
money option on that stock? Probably not, as the stock's current price fluctuations may not justify paying such a
high premium. Instead, maybe you'd be willing to pay $1.50 or $2.00 for that option.

The simple examples above should help demonstrate why realized volatility has important implications for SPX
option premiums (and therefore the VIX Index, futures, and VIX ETP performance).

VIX Influencer #2: Market Direction

While mentioned in the previous section, we'll dive a little bit deeper and discuss why market direction has such a
strong influence on the price changes of VIX futures and the VIX Index.

When the market falls notably, the VIX Index has a tendency to rise significantly. The higher the velocity and
magnitude of the market decrease, the more the VIX Index typically rises.
Let's verify this by analyzing some downside market movements in recent years:

Date Market Return* VIX Change*

August 24th, 2015 -3.94% 28.03 to 40.74 (+45%)

June 24th, 2016 -3.59% 17.25 to 25.76 (+49%)

July 31st, 2014 -1.99% 13.33 to 16.95 (+27%)

April 3rd, 2013 -1.05% 12.78 to 14.21 (+11%)

*Previous day's close to following day's close.

While there isn't an exact ratio between market movements and changes in the VIX Index, the important thing to
keep in mind is that larger market movements are likely to have more of an impact on SPX option prices, and
therefore, the VIX Index.

Applying the above concepts to volatility trading strategies, the following guidelines should be kept in mind:

✓ When shorting volatility (bearish VXX or UVXY, bullish SVXY), you should have a neutral to bullish market
assumption, as violent market decreases will cause an increase in the VIX Index/futures, leading to potentially
large losses for short volatility strategies.

✓ When buying volatility (bullish VXX or UVXY, bearish SVXY), you should have a short-term bearish
market assumption, as swift market decreases will cause an increase in the VIX Index/futures, leading to
potentially large gains for long volatility strategies. Note that "short-term" was included in the assumption. Over
prolonged periods of time with contango present, long volatility strategies have a higher probability of losing money.

VIX Influencer #3: Potential Market-Moving Events

While changes in the price of the S&P 500 Index are the primary driver of changes in the VIX Index and futures,
there are times when the VIX can be influenced without a significant market move.

Occasionally, there will be an upcoming event that could potentially lead to significant changes in the market, which
can cause traders and investors to bid up SPX option prices before the event to hedge their portfolios. The pre-
event hedging can cause notable increases in the VIX Index and futures, which clearly impacts the short-term
performance of VIX ETPs.

Take a look at the following chart for an example:

In the shaded region, the S&P 500 Index fell approximately 1.5% (over a multiple-week period), while the VIX Index
surged from 11.5 to 16 (an increase of 39%).

In this particular example, the surge in the VIX Index was caused by hedging activities ahead of French Presidential
Elections. The increase in SPX options (and therefore the VIX Index) indicates that market participants believed one
of the candidate's policies would potentially be harmful to the United States economy.
However, as we can see in the chart, the market quickly rebounded and the VIX got crushed after the results were
known and traders sold their protection. 

While it's very hard to predict how the market will price in the risk related to political events, it's good to know that
we will sometimes observe substantial shifts in the VIX Index and futures ahead of such events.

What Causes VIX Term Structure Shifts?

✓ VIX Term Structure vs. Realized Volatility: The magnitude of daily price fluctuations (realized volatility) in the
S&P 500 are a major influence on the level of the VIX Index and futures. When the market is more volatile, traders
are willing to pay more for options, increasing option prices and therefore the VIX Index. During quieter, less volatile
periods, traders aren't willing to pay as much for options, resulting in cheaper options and a lower VIX Index.

✓ VIX Term Structure vs. the Market: The VIX Index and futures have a strong negative correlation to the overall
market. That is, when the market falls, the VIX Index and futures typically rise as traders and investors buy more
insurance (via SPX options) against long stock portfolios. On the other hand, when the market is quiet and grinding
higher, there's less demand for insurance through SPX options, which leads to cheaper SPX option prices and
therefore lower VIX Index and VIX future values.
✓ VIX Term Structure vs. Upcoming Market Catalysts: Another influence on the VIX Index and futures
is upcoming market catalysts or geopolitical events. For example, an upcoming presidential election could cause
traders and investors to hedge their portfolios before the event, which can cause an inflation in VIX products (as
demand for SPX options increases). These types of events typically impact the front-end of the VIX term structure
the most.

Congratulations! By now you should have a very deep understanding of what drives returns in volatility products, as
well as when certain volatility products have the "edge."

Next, we'll dive into trading strategies we can use to safely trade volatility ETPs.
 Section 4 - Dangers of Trading Volatility Products

By now, you've been introduced to the most important concepts related to long and short VIX ETPs, but we need to
talk about risks.

While not an exciting topic, being aware of risks is entirely necessary so that you can avoid the catastrophic
experiences of so many beginner volatility traders.

After we talk risks, we'll discuss volatility trading strategies (with backtests) that you can use to safely trade volatility
products.
 Dangers of Trading Volatility Products

A major part of successful trading is being aware of the risks associated with the trades you make. When you know
what can go wrong, you can make more intelligent decisions about what strategies to use and how to size trades in
a way that keeps you in the game when things inevitably go wrong.

Three Big Risks

When trading volatility products, there are three primary risks that can lead to disastrous results.

Risk #1: Not Understanding Volatility Product Mechanics

The first risk is not understanding how volatility products work, which leads to disastrous results for traders who
make trades in these products while believing they understand what they're doing.

Many new traders believe long VIX ETPs (VXX and UVXY) track the VIX Index in some way (while it does indirectly
and on a short-term basis, long VIX ETP performance does not track the long-term performance of the VIX Index).
As you know, all VIX ETPs track the daily percentage change of the near-term VIX futures contracts (with VXX
tracking 1x the daily change, UVXY tracking 2x the daily change, and SVXY tracking -1x the daily change), which
are less sensitive to changes in the VIX Index, and are subject to gains/losses as they converge towards the VIX
Index over time.

The most notable risk related to long VIX ETPs:

✓  The steady decay of long VIX ETPs VXX and UVXY as a result of the VIX futures being in contango most of the
time. The more VXX and UVXY decay, the larger the volatility increase needs to be to get back to even (or VIX
futures need to go into backwardation for a prolonged period of time).

Risk #2: Inverse Volatility Products Can Go to $0 (or Force You Out in a Downturn)

The second largest risk related to VIX ETPs is that the inverse products (SVXY) can go to $0 if a large volatility
shock occurs. For SVXY to go to $0, the 30-day synthetic VIX future would have to increase by 100% in a single
trading day. While extremely unlikely, it's still a possibility. UPDATE: On February 5th, 2018, XIV and SVXY lost
90%+ of their value in a single trading day.
However, it's important to note that a 100% decline is not needed to spell serious trouble:

✓  In the XIV prospectus, it was stated that a one-day, 80% decrease in XIV may lead to the issuer redeeming
(closing down) XIV "shares." An 80% decrease in XIV would require the 30-day synthetic VIX future to rise 80% in a
single day. UPDATE: XIV was terminated due to a 90%+ decrease on February 5th, 2018.

✓  If a series of large volatility increases occur in a short period, or backwardation in the VIX futures market persists
for a few weeks or months, XIV and SVXY could very well lose 90%+ in value.

As a result of the above risks, XIV and SVXY are NOT buy-and-hold investments (as seen in February of 2018). If
you buy SVXY long-term, you better be willing to lose everything that you've invested. Fortunately, we can use
options on SVXY to create low-risk, high-reward positions that benefit from changes in SVXY without the "blowout
risk" of allocating a large percentage of a trading account to the shares.
Lastly, investors looking for a more conservative investment vehicle with short volatility exposure can look to ZIV,
the S&P 500 Medium-Term VIX Futures ETN. ZIV is essentially SVXY, but tracks the 4th- through 7th-month VIX
futures contracts, which means it is much less prone to catastrophic drawdowns in short time periods.

Risk #3: ETNs and Credit Risk

The third largest risk related to volatility products is that they are mostly ETNs (Exchange-Traded Notes), which
differs from an ETF (Exchange-Traded Fund) quite significantly.

ETFs actually own the assets in which the fund tracks, while ETNs do not.

If the issuer of the ETN you own goes bankrupt, you will likely lose 100% of the capital invested in that ETN. While
an incredibly low probability event, it is still a risk and worth mentioning.

Of the volatility products, VXX and ZIV are ETNs.

 How to Protect Yourself Against These Risks

To mitigate the risks discussed above, there are some simple steps one can take:

✓ Develop a clear understanding of how volatility ETNs work (which you've accomplished in the previous sections
of this course).

✓ Use small trade size and/or leverage with options on volatility ETNs as opposed to buying shares with a large
percentage of your account. Some traders allocate 100% of their account into these products, which is a recipe for
disaster over the long-term.

✓ Use a strategy that exits positions when the volatility landscape becomes less favorable for that strategy
(discussed in the strategies section of this course).

Biggest Risks Related to Trading Volatility Products

✓ Not understanding the mechanics behind volatility products is a common cause of trading losses. You need to
understand what you are trading before you put money at risk.

✓ Long volatility products typically experience a slow bleed towards $0 as time passes, which means long-term
investments are likely to end up worthless. Inverse volatility products also have the potential to go to $0 if the
market experiences a severe shock that sends VIX futures significantly higher in a short period.

✓ Most volatility products are ETNs, which means investors and traders are exposed to credit risk. If the issuer of an
ETN goes bankrupt, the entire investment in an ETN could end up worthless.

While not exciting, the contents above are very important to keep in mind when trading volatility products. In the
final section, we'll cover volatility trading strategies and statistical analysis of VIX ETPs so that you can safely trade
volatility for maximum gains and acceptable drawdowns.

5 - Volatility Trading Strategies

Up to this point, everything we've discussed has been merely educational, as understanding how volatility products
work and what drives their returns is essential to formulating trading strategies using these products.

In this section, we'll examine statistics related to VIX ETP performance in various market conditions (degrees of
contango/backwardation in the VIX futures), as well as option strategy performance with strict entry/exit criteria.

After this section, the course will be "complete" in that you'll have read through all of the material. However, keep in
mind that you'll have full access to all additions/revisions to the course in the future. As our trading strategies and
research improve over time, you'll be notified of the updates.

1 - VIX ETP Performance vs. Roll-Yield

Before getting to specific trading strategies, we need to understand how VIX ETPs have performed historically
during periods of minor/major degrees of contango/backwardation.

We'll start by visualizing the 30-day average contango percentage* between the first- and second-month VIX futures
contracts since late 2011 (the earliest in which all four of the primary VIX ETPs existed):

*Premium of second-month future to first-month future. Positive numbers indicate the second-month future is at a
premium to the first-month future (contango). Negative numbers indicate the second-month future is at a discount to
the first-month future (backwardation).

As the above visual shows, the average 30-day contango percentage between the first- and second-month VIX
futures has been positive (meaning the VIX futures have been in contango) most of the time since late 2011.

How have each of the three primary VIX ETPs performed in these various environments? To answer this, we'll look
to the average 30-day return of each VIX ETP at various degrees of average 30-day contango/backwardation:

Avg. 30-Day Return

Contango
Count** VXX UVXY SVXY
%*

-5% to -10% 10 +17% +24% -23%

 Avg. 30-Day Return

Contango
Count** VXX UVXY SVXY
%*

-5% to 0% 119 +8% +14% -11%

0 to 5% 313 0% -2% -2%

5 to 10% 640 -8% -17% +7%

10 to 15% 281 -13% -26% +13%

15 to 20% 54 -19% -35% +21%

*(Second-Month VIX Future - First-Month VIX Future) / First-Month VIX Future

**Number of 30-day periods since late 2011 with the given contango percentage.

Upon examining the table from above, we confirm the following concepts discussed in earlier sections:

✓ Sustained periods of significant contango (greater than 5% contango between the first two VIX futures contracts)
lead to poor performance in long VIX ETPs (VXX and UVXY) and strong performance in the short VIX ETP, SVXY.
✓ Sustained periods of backwardation (-5% or lower contango percentage) lead to strong performance in long VIX
ETPs (VXX and UVXY) and weak performance in the short VIX ETP, SVXY.

✓ The degree of strong/weak performance observed in VIX ETPs is correlated to the degree of
contango/backwardation in the VIX futures.

As you know, we cannot look exclusively at the contango percentage (roll-yield) between the first- and second-
month VIX futures when making trading decisions. The absolute level of the VIX Index and near-term futures has
important implications for potential VIX ETP performance in the future.

Please Note: The above statistics encompass historical volatility product movements with their original leverage
objectives. On February 26th, 2018, SVXY's leverage objective was reduced to -0.5x the daily percentage change
in near-term VIX futures, while UVXY's objective was reduced to 1.5x the daily percentage change in near-term VIX
futures.

In the next section, we'll analyze historical VIX ETP performance based on various VIX Index and futures levels.
 2 - VIX ETP Performance vs. VIX Index
Largest One-Month VXX Increases / XIV Drawdowns

To kick off this section, let's analyze some of the biggest one-month (21 trading days) VXX increases / SVXY
drawdowns in relation to the change in the VIX Index and near-term futures at the beginning and end of the period:

End of One- VXX SVXY VIX Index M1 VIX Future

Month Period Return Return Change Change*

Feb. 8th, 2018 +110% -93% 10.08 to 33.46 10.68 to 28.10

Sep. 1st, 2015 +94% -55% 13.00 to 31.40 14.15 to 29.70

Oct. 16th, 2014 +48% -39% 12.03 to 25.20 14.05 to 22.27

Jan. 15th, 2016 +38% -32% 17.86 to 27.02 18.10 to 26.50

Jun. 1st, 2012 +37% -32% 17.56 to 26.66 18.80 to 27.75

Feb. 5th, 2014 +29% -26% 12.92 to 19.95 13.64 to 19.10

*The front-month futures contract will change during most 30-day periods as the nearest-term future expires. Either
way, we look at the change in the front-month VIX future over the period to get a general idea of how near-term VIX
futures prices shifted.

Please Note: The above statistics encompass historical volatility product movements with their original leverage
objectives. On February 26th, 2018, SVXY's leverage objective was reduced to -0.5x the daily percentage change
in near-term VIX futures, while UVXY's objective was reduced to 1.5x the daily percentage change in near-term VIX
futures.

The periods above include some of the largest one-month movements in VXX and XIV since late 2011.

As we can see, the two largest VXX increases and SVXY drawdowns began with an incredibly low VIX Index and
front-month VIX future (M1 VIX future). Part of those returns can be explained by the fact that a large volatility
increase that starts from a low volatility level results in a significant percentage change in the one-month
synthetic VIX future.

Of course, significant changes in VXX and SVXY can occur from a higher volatility starting point, but it is important
to note that the largest changes have occurred with a low starting VIX.

What does that mean for volatility trading strategies? Well, if a trader were to get long volatility (buy VXX or
UVXY, short SVXY), it may be worthwhile to wait until the VIX Index and futures get close to the lower extremes
examined in the previous section of this course. However, a low VIX Index itself does not indicate an increased
probability of a VIX increase. 
Conversely, if a trader were to short volatility (buy SVXY, short VXX or UVXY), it may not be wise to do so when the
VIX Index and near-term futures are incredibly low, as the reward is minimal (since the VIX futures don't have much
room to collapse) and the risk is substantial (since a volatility spike from a low starting point results in a massive
percentage increase in long VIX ETPs and decrease in short VIX ETPs).

Largest One-Month VXX Decreases / SVXY Increases

Since we've looked at the largest VXX increases and SVXY decreases, let's take a look at the largest XIV increases
and VXX decreases over one-month periods since 2011:

End of One- VXX SVXY VIX Index M1 VIX Future

Month Period Return Return Change Change*

Mar. 26th, 2012 -38% +54% 18.19 to 14.26 21.55 to 15.63

Jul. 26th, 2016 -35% +45% 23.85 to 13.05 23.70 to 15.20

Jan. 29th, 2013 -35% +43% 22.72 to 13.31 22.35 to 14.04

Jul. 23rd, 2013 -31% +43% 20.11 to 12.66 20.12 to 14.62

Jul. 2nd, 2012 -34% +41% 26.12 to 16.79 26.95 to 18.14

*The front-month future will change during most 30-day periods as the nearest-term future expires. Either way, we
look at the change in the front-month VIX future over the period to get a general idea of how near-term VIX futures
changed.

Do you notice a difference between the results in the table above and the results from the previous
section?

When analyzing the largest one-month VXX decreases/SVXY increases since 2011, we find that the largest one-
month changes started from medium-high VIX Index/futures levels.

The results can be explained by the fact that short-term explosions lower in VXX and higher in SVXY are
unlikely to occur when the near-term VIX futures are already at incredibly low levels (below 13 or 14, for
example), which supports ideas presented in the "Curve Shifts" section of this course.
 3 - Systematic Short Volatility Strategies
Based on our research, VXX is the most conservative vehicle for systematic short volatility strategies, as
long puts have a higher probability of expiring in-the-money and short calls have a higher probability of
expiring out-of-the-money due to the structural edge in VXX.

The structural edge we're referring to is the fact that VXX steadily loses value over time. Since VXX's daily returns
track the percentage returns in near-term futures, VXX's likelihood of increasing back to a long put/short call strike
price that we trade diminishes over time, as VXX loses value.

In addition, VXX options are extremely liquid, whereas SVXY options can be very illiquid depending on the strike
price and expiration. The illiquidity in SVXY options can make trade execution difficult at "fair" prices, and
strike/expiration selection is often limited to the most liquid of choices.

Potential Strategy Combinations

Now that we know we'll at least be starting with VXX for our systematic short volatility trading strategy, how can we
come up with the specifics for our strategy?
Doing so will not be easy, as there are many variables that we can adjust, leaving us with virtually infinite strategy
combinations.

Here are the variables that need to be determined in every systematic trading strategy:

✓ Product/Stock?

✓ Which Options/Strike Price to Use?

✓ Trade Time Frame?

✓ Entry/Exit Triggers?

✓ Trade Size?

We spent a considerable amount of time backtesting each input separately to determine the most consistent
strategies. We will not post every iteration of our testing here, as that would consist of posting hundreds of charts
and explaining the results of each.

Instead, we'll discuss our "best version" (we are always trying to conduct more research and improve our strategies
over time) of the strategy based on:

 
Consistency of Yearly Returns

Maximum Peak-to-Trough Portfolio Drawdowns

Overall Return

Frequency of Profitable Trades 

Ideally, a trading strategy has a steadily increasing equity curve (portfolio value over time) with shallow drawdowns.

With that said, it's important to note that we are trading volatility products. By their very nature, volatility products are
highly volatile. As a result, trading strategies implemented on these products will sometimes experience volatile
periods.

Systematic Strategy Variables

The first strategy we investigated was that of long at-the-money puts in VXX.

Of the variables we tested, here were some of the parameters we tweaked and tested:
Time Frame: 30, 60 and 90 Days to Expiration

Strike Price: 10% OTM, 5% OTM, At-the-Money, 5% ITM, 10% ITM, 15% ITM.

Entry Triggers (VIX Index Level): All VIX Levels, VIX Above 12.5, VIX Above 15, VIX Above 17.5, VIX Above 20.

Entry Triggers (M2 Closing Price): All M2 Levels, M2 Above 15, M2 Above 14, M2 Above 13.

Entry Triggers (Roll-Yield): All Roll-Yield Levels, >0% Roll-Yield (Contango), >5% Roll-Yield, >7.5% Roll-Yield,
>10% Roll-Yield.

Exit Triggers (Profit-Target): No Profit Target (Held to Expiration), 25% Profit Target, 50% Profit Target, 75%
Profit Target, 100% Profit Target.

Exit Triggers (Loss-Limit): No Loss Limit (Profit or Expiration), -25% Loss Limit, -50% Loss Limit, -75% Loss Limit.

% ITM: % out-of-the-money based on the stock price. E.g. 10% OTM would be purchasing a put with a strike price
10% below the stock price.

% OTM: in-the-money based on the stock price. E.g. 10% ITM would be purchasing a put with a strike price 10%
above the stock price.

M2 Closing Price: The closing price of the second-month VIX futures contract (M2 or Month 2).

Roll-yield/Contango Percentage: Example: 5% roll-yield means the second-month VIX future is at a 5% premium

to the first-month VIX future.
Percentage Gain on the Premium Paid: Example: 50% profit target means the option was sold once the price
increased 50% from the entry price. So, if an option was purchased for $1.00, the target exit price was $1.50.

Percentage Loss on the Premium Paid: Example: -25% loss limit means the option was closed once the price
decreased by 25% from the entry price. So, if an option was purchased for $1.00, the option was sold if its value fell
to $0.75.

Systematic VXX Strategy: Long Puts

The first strategy we will investigate in this course is that of a long put strategy on VXX. Let's do a little Q&A to
answer questions you probably have about the strategy.

Q: Why buy puts on VXX?

A: As we've discussed previously in this course, VIX futures are typically in a state of contango (longer-term
contracts at a premium to shorter-term contracts). When VIX futures are in contango, the contracts lose value over
time as they converge to the lower VIX Index.
The negative price performance of near-term VIX futures generates steady losses for VXX that become more
unlikely to recover over longer periods of time. Since owning put options is a negative delta strategy, long put
positions benefit from the steady price decreases in VXX.

Q: Why not choose a higher-probability strategy like selling call options or call spreads?

A: Because VXX operates based on daily percentage changes in the near-term VIX futures, and a prolonged period
of VIX futures backwardation can lead to an exponential increase in VXX, selling naked call options on VXX is
incredibly risky. For example, if a trader was short VXX calls and a market catastrophe occurred, the losses on a
naked call position could be substantial.

Additionally, because VXX exhibits upside volatility skew, selling call spreads results in very small amounts of
premium collection (which means very little reward and lots of risk).

By purchasing put options on VXX, traders can enjoy substantial profits when VXX's value evaporates from
prolonged VIX futures contango, while also having limited loss potential if a market disaster strikes and the VIX
Index/futures blast off.

VXX Long Puts

Let's examine the specifics of the best versions of the VXX/VXX put strategy we've researched:

Product: VXX (iPath S&P 500 VIX Short-Term Futures ETN)

Time Frame/Expiration: Closest to 60 days to expiration (60 DTE).

Strike Price: At-The-Money (strike closest to VXX price at entry).

Entry Triggers: M2 VIX Future Above 15, Roll-Yield Above 7.5%.

Exit Trigger: 150% Gain on Premium or Expiration, whichever comes first.

Trade Size: 5% of Account (can be adjusted to each trader's risk tolerance. The important thing is that the size is
consistent in each trade).

The strategy is simple to execute and goes like this:

Whenever the VIX futures roll-yield exceeds 7.5% (the second-month VIX future is at a 7.5% or greater premium to
the first-month VIX future) and the second-month VIX future (M2) is also above 15, a trader purchases at-the-money
VXX puts in the expiration cycle closest to 60 days.

Here's an image from VIX Central with valid entry metrics:

The amount of puts purchased should equate to the same percentage of the account value each time. In this
course, we'll examine the performance of the strategy when 5% of the account is allocated to each position.

For example, if the portfolio is $10,000 and the at-the-money put costs $5.00, the trader would purchase one
contract to risk 5% ($10,000 Account Value x 5% = $500 in risk potential, which is one $5 option contract).

The position would be held until the option increased in value by 150% (e.g. if an option was purchased for $1.00,
sell the option if it reaches $2.50). If the 150% profit target is not reached, hold the option until it expires.

No losses are taken on unprofitable trades.

Number of Positions

At any point in time, there is only one trade on in the portfolio. No overlapping positions are entered.

Strategy Performance: 2.5% - 10% Risk Allocation

Starting in late 2011, here's how the proposed strategy has performed (2.5% - 10% of account risked in each
position) when strictly following the rules outlined above:
*Please Note: Hypothetical computer simulated performance results are believed to be accurately presented.
However, they are not guaranteed as to the accuracy or completeness and are subject to change without any
notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual
performance record, simulated results do not represent actual trading. Also, since the trades have not actually been
executed, the results may have been under or over compensated for the impact, if any, or certain market factors
such as liquidity, slippage and commissions. Simulated 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 portfolio will, or is
likely to achieve profits or losses similar to those shown. All investments and trades carry risks.

With a 2.5% to 10% allocation to each trade, the model portfolios grew between 47% and 358% in just over 5 years.
More importantly, the largest peak-to-trough (from new highs to subsequent lows) drawdowns were very minor
relative to the S&P 500's 50%+ decline in 2008, and comparable to the drawdowns seen during the VXX strategy
period.
Here are some metrics related to the strategy as compared to the S&P 500:

S&P
VXX Put Strategy
500

Metric 2.5% 5% 7.5% 10% 100%

Overall Return +47% +120% +219% +358% +91%

% of Profitable Trades 80% -

1: - 1: - 1: - 1: -

1: -
5.9% 11.8% 17.3% 22.2%
14%
2: - 2: - 2: - 2: -
Top 3 Peak-to-Trough Drawdowns* 2: -
3.3% 6.8% 10.0% 13.1%
10%
3: - 3: - 3: - 3: -
3: -8%
3.1% 6.4% 9.5% 12.7%

Compound Annual Growth Rate +7.6 +16.0 +24.4 +33.3 +13.0

(CAGR)** % % % % %

*Calculated using closing prices.

**The annualized portfolio growth that accounts for compounding.

The above equity curve and metrics demonstrate the power of using options properly in an investment portfolio.
With a small amount of risk implemented strategically and systematically, traders and investors can grow their
portfolios at a similar or greater pace than a buy-and-hold investment in equity index.

More importantly, the portfolio growth can potentially occur with very shallow, manageable drawdowns and a high
rate of success.

The 7.5% risk per trade portfolio experienced similar peak-to-trough drawdowns relative to a 100% passive
investment in the S&P 500 over the same period. However, the VXX long put strategy with 7.5% risk per trade had
an overall return nearly four times greater than the S&P 500 investment.

Entry/Exit Criteria Discussion

At this point, you may be wondering if we can expect this strategy to continue performing well into the future.

While nothing is guaranteed, the entry/exit criteria protect us from entering the trade when the market environment
is unfavorable.
 High Roll-Yield & Minimum M2 VIX Futures Level

For example, by limiting entries to when roll-yield is greater than or equal to 7.5%, and when the M2 VIX future is
above 15, we protect ourselves by:

1) Not entering a short VXX position when the VIX futures contango is not at our back. 

2) Not entering a short VXX position when the VIX term structure doesn't have much room to move lower. If we
entered a short VXX position with the M2 VIX future at 13, it's likely that the VIX Index is less than 12, which means
we may not want to put on a short volatility trade.

With the M2 VIX future above 15, the VIX Index is likely between 12 and 14, which, while low, is a range that the
VIX Index can average during bullish market periods with low realized volatility in the S&P 500.

Choosing Trade Size Appropriate for YOU

It's easy to look at the above chart and metrics and think risking 10% per trade is the best approach. I'd caution
against simply using the largest risk possible to achieve the highest returns, as sticking to a systematic strategy can
be much more difficult during large drawdown periods.
For instance, if your portfolio lost 20% or more of its value when implementing the VXX put strategy, how likely are
you to continue implementing the strategy? Many people get shaken out of their strategies when they lose big,
which means there's no chance for that money to be recovered by trusting a trading system long-term.

So, always be sure to think about what types of drawdowns you are willing to accept before implementing a strategy
and/or choosing trade size. Since the above results are historical, I'd add a multiple of 1.5x to the max drawdowns
seen and ask yourself if you are comfortable with such a drawdown. For instance, with the largest peak-to-trough
drawdown of 22% for the 10% risk per trade approach, would you be able to handle a 30-35% portfolio drawdown?
If not, then don't use 10% as the trade size. Scale down and sacrifice reward potential for peace of mind, smaller
expected drawdowns, and more ability to stick to the plan through losing months.

VXX Put Spread Strategy

I am still digging into the research for this VXX put spread strategy, but this is a more frequent setup and simple
setup that I use for bearish VXX entries.

The long put setup as researched above has had infrequent entries since 2017, as the volatility landscape changed
in 2018 and 2019. The sustained ultra-low volatility period ended, which is when an aggressively bearish VXX
strategy like buying puts works best.
For a more frequent entry setup that still follows the same philosophy, I look to the relationship between the 30-day
synthetic VIX future and the VIX Index (as mentioned in an earlier section of this course).

First, I look for a 10%+ premium of the synthetic 30-day VIX future to the VIX Index, which can easily be gauged by
viewing the M(1&2) to VIX metric on this website:
In this instance, the 30-day synthetic VIX future is at a 19.53% premium to the VIX Index, which is significant!

With the percentage greater than 10%, I would look to enter a long put spread in VXX by purchasing an at-the-
money or slightly in-the-money put option, and selling a put option about 10-15% below the current VXX price.

The trade is made in the expiration nearest to 60 days:

If I bought the put with a strike price just in-the-money, and sold the put at the strike price about 10% below VXX's

current price, I'd have the following spread (click on the image to enlarge it):
In this instance, the spread's max loss is $163 and the max profit is $137, which would occur if VXX was below $18
in 57 days.

During a period of sustained contango, a 10% decline in VXX is very likely over a 60-day period. Additionally, the
further VXX falls, the harder it will be for VXX to get back above the spread's strike prices, as VXX tracks the daily
percentage change of the 30-day synthetic VIX future.

As VXX's base price gets lower, a larger percentage increase is needed to get back to where it was before the
decrease.

For instance, if VXX fell to $16, a single-day 10% increase in the 30-day synthetic VIX future would leave VXX at
$17.60, which is below the put spread's short strike of $18.

If VXX fell to $16, the 30-day synthetic VIX future would need to increase by 25% for VXX to get back to $20.
In other words, the more VXX decays while you are in a bearish VXX position, the more likely it is that your position
will end up profitable, as a larger and larger volatility increase is needed to bring VXX back up to the price it was
before the decay.

Instead of buying the first in-the-money put, a trader could buy the at-the-money or first out-of-the-money strike to
reduce the cost of the spread and improve the risk/reward profile. Play around with the spreads to get a position that
you like.

These trades can be closed for a profit early by closing at 50%+ of the max profit, but I like to hold these trades
longer due to the fact that the lower VXX gets, the more likely it is that the spread will expire fully in-the-money (as a
larger volatility increase will be needed to bring VXX back above the spread).