When trading this system, you are either long the VXX/VIXY, Long the SVXY (short VXX) or in cash (no position). It is that simple and very effective.

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1 Len Yates founded OptionVue Systems 34 years ago and has extensive experience trading the Markets. This easy-to-trade system is the most exciting trading idea he has seen in all his years following the markets. The heart of the trading system is our proprietary indicator, the Yates VXX Indicator (YVI). It provides the entry and exit signals for the VXX Trading System. Other indicators have also been developed by Len to give you more information on the current conditions for the Volatility Products we trade. When trading this system, you are either long the VXX/VIXY, Long the SVXY (short VXX) or in cash (no position). It is that simple and very effective. Len has built the proprietary indicators used in the VXX Trading System into the OptionVue 8 software to enable OptionVue clients to easily trade the VXX system on their own. However, the OptionVue 8 software is not required to trade this system. Subscribers can see the information right on the VXX Trading System website and you will receive s for every trade alert. 1

2 OptionVue Systems International, Inc, N Ashley Blvd, Suite 102 Libertyville, IL Phone: Table of Contents Introduction Page 3 Trading the VXX: From the Beginning. Page 4 Trading the VXX: A New Beginning...Page 14 Volatility Cones and Volatility Term Structure Page 17 Special Note on the Closing of XIV... Page 19 2

3 Introduction OptionVue has offered the VXX Trading system since April As we have traded it and gained more experience, we have adjusted the rules to better perform in all types of markets. This ebook goes over the research and trading rules we have used and how they have evolved over time. First is an article by Len Yates that details the original system and the ideas and concepts behind it. The VXX Trading System gained 102% over the first four years. After getting significantly lower returns in 2014 and 2015 we began to look at ways the system might be improved. The article A New Beginning outlines the current trading rules we use and introduces our new indicator, the Yates VXX Indicator ($YVI). Since these new trading rules were introduced, the VXX Trading System returned 132% over the period March 6, 2016 through December 31, 2016 and had a 52.1% return in Everyone here at OptionVue is very excited about the performance of our new system. We hope you find it just as interesting and exciting as we do. Disclaimer Educational materials are provided by OptionVue Systems International, Inc. for informational and educational purposes only and are not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees. Volatility Products involve risk and are not suitable for all investors. In addition, electronic trading poses unique risk to investors. System response and access times may vary due to market conditions, system performance and other factors. You should thoroughly research and understand any security before investing in it. OptionVue provides neither investment nor tax advice. 3

4 Trading the VXX: From the Beginning By Len Yates. First Published in April 2012 In the Feb 23, 2012 issue of The Option Strategist, Larry McMillan wrote about a system for trading the VXX and XIV which seemed remarkable in its simplicity and its high rate of return a tenfold increase in 5.5 years time. There were actually two long 30-day volatility products available, VXX and VIXY. There were also two short (inverse) 30-day volatility products, XIV and SVXY. These are interchangeable in terms of return you will receive, but note that there are tax and other differences between them (Editor s note: The XIV is closed as of February 20,2018 leaving only SVXY for trading 30-day volatility). Whenever this article mentions VXX, it applies equally to VIXY and where XIV is referenced it applies equally to the SVXY) This system only involved 14 trades, so it doesn t even require you to become an active trader. Intrigued by this trading approach, I decided to develop some tools and information to assist in my own trading. Let s cover the basics. This is not an option trading strategy per se; but rather a strategy for trading two of Barclays Volatility ETNs the VXX and the XIV. Note that the XIV is a mirror image of the VXX, so the XIV is useful when you would like to be short the VXX but are not allowed to short stocks in your account. You simply buy the XIV when you want to be short the VXX. What are these two ETNs and what is the advantage to trading them? Quoting McMillan, Both VXX and XIV are constructed in such a way that they actually own (or are short) the two $VIX nearest-month futures. Each day, part of the position is rolled forward [so that a constant 30-day forward position is simulated]. When the term structure slopes upward (which it does most of the time), that daily roll is a debit, and is a drag on the performance of VXX vis-à-vis $VIX. However, since XIV is the opposite, it is a boon to XIV. Conversely, when the term structure of the $VIX futures slopes downward, the daily roll forward for VXX is a credit, allowing it to outperform $VIX (and consequently is a detriment to XIV). 4

5 Continuing, The idea behind the trading system is simple enough: when the $VIX futures slope upward steeply enough, that is a roaring bull market, and we want to own XIV (i.e. we want to be short $VIX) because the daily roll is beneficial and because $VIX is expected to decline. On the other hand, when the slope is downward, we want to do the opposite: own VXX, because the market is bearish, $VIX is increasing, and the daily roll is beneficial to VXX. We tested entries when the differential in the first two months, or in months one and three, was of a certain level. The exit criterion that worked best in all cases was to terminate the trade when the term structure flattened enough so that the two futures in question were within a half point of each other. Please Note: In the following pages you will read a lot about the $VXDIF, which used to be our main indicator giving us the signals to be in the VXX or XIV. The $VXDIF is still available in our system and updating in real time but our main indicator is now the $YVI, discussed beginning on page 14 The $VXDIF Index Since our approach focuses on the term structure of the VX futures, and in particular the difference between the prices of the nearest two of them, I created a new index that constantly computes this difference. I named this index $VXDIF, and it represents the price of the 2nd VX contract minus the price of the 1st VX contract. The difference between the two VX futures can be a negative number. I gave this index a neutral bias number because our system cannot handle an item with a negative price. So, when the difference between the two futures is zero, the $VXDIV displays 10 as a Last price. To help matters even further, since the $VXDIF is meant to be viewed as an instantaneous number (i.e. all that matters is the current value), I programmed it to always have a Prev of 10, with the result that when you are looking at OptionVue or the member section of the VXX website, the today s Change computes out to be precisely what we are interested in the price difference of the two VX futures. So, when you see that the $VXDIF Change is +3.05, for example, that tells you that the 2nd VX contract is 3.05 points higher than the nearby VX contract, indicating a steep upward slope (contango) in the VX futures term structure. Or if the $VXDIF Change is -0.75, for example, there is a mild downward slope (backwardation) in the VX futures term structure. Therefore, when looking at a quote on the $VXDIF, Change is the number to focus on. 5

6 In addition to providing $VXDIF on an instantaneous basis, we were able to construct a history of this index back to July 2007, approximately the time when VX futures began trading. I would like to show how the $VXDIF could be used to give signals on trading the VXX using a 15-day moving average of the $VDIF (Figure 1). Figure 1: Historic Chart of VXX with $VXDIF 15-Day Moving Average in Lower Chart This new indicator (the solid blue line) simply displays a moving average of the value of the $VXDIF itself, except that the built-in bias of 10 is removed so as to display values that swing above and below zero. We initially included the Lentz Volatility indicator (LVI, an indicator of market volatility). The details of LVI are unimportant since we later replaced this with a new proprietary indicator, the Yates VXX Danger Indicator ($YVD). Browse back in time through an $SPX price chart and it will not take long to notice that, in general, when the 15-day moving average of $VXDIF is positive, the stock market is moving up and it is ok to be short the VXX (or long the XIV). When the moving average of $VXDIF is negative, the stock market is experiencing a rough time and it is ok to be long the VXX. The trends in this period have been long lasting and effective for this trading approach. Initial Results Using $VXDIF 6

7 Using just the $VXDIF 15-day MA (denoted $VXDIF 15 ), a simple system where you are long the XIV when the $VXDIF 15 is positive and switch to being long the VXX when the $VXDIF 15 is negative could be tested. Beginning in January 30, 2009 when the VXX first became available, the trades signaled by this approach would have been: Long/Short Enter Date Enter Price Exit Date 7 Exit Price Days Held Trade Profit Percent Cum NAV 1.00 Long VXX 1/30/ /13/ % 0.96 Long XIV 4/13/ /18/ % 4.92 Long VXX 5/18/ /27/ % 4.79 Long XIV 5/27/ /5/ % Long VXX 8/5/ /23/ % Long XIV 11/23/ (open) % The result was an amazing times your money in the 3.8 year period. Note that the final position was still on when I did this initial research (11/13/12). Note: The XIV hasn t been around long enough to be tradable during this entire period, so for the sake of this study I augmented the historical data in the XIV by assuming mirror image percentage daily moves vis-à-vis the VXX, going back to the first day of the VXX s existence. So please note that data prior to Nov 30, 2010 is theoretical, while data from Nov 30, 2010 on is actual trade data. Finally, the first trade was put on right when the VXX became available for trading and the $VXDIF 15 was negative at that time. It could be argued that this trade does not belong in the study because it was not triggered by $VXDIF 15 crossing the zero line. However, it was just a small loss and therefore it doesn t matter very much. Refining the $VXDIF Results As remarkable as this system seemed to be, I was troubled by the fact that the flash crash was not handled well by using the $VXDIF 15 alone. So, I looked for ways to improve the entry and exit rules by adding an indicator or two. Naturally we want to avoid complicating the system too much and we should guard against curve fitting where you fine tune several parameters until you have a system that would have worked nearly to perfection in recent history. What happens with curve fitted systems is that as soon after you begin to trade them you discover that they don t work. (I know from personal experience.) First, let s take a look at the period of time in question

8 (Figure 2) Figure 2: Historic Chart of VXX in 2010 with the LVI15 in Lower Chart We are focusing on the period from May 1st until July 15th, in the chart above. This was the flash crash and subsequent rough period lasting 3-5 months. We would have liked to see the $VXDIF 15 line (the solid blue line) swing more firmly into negative territory during this period. Instead, it waffled close to, and mostly above, the zero line. Following the system (as we did in the study) switched us out of short VXX and into long VXX way too late, and switched us back into being short the VXX earlier than it really should have. That is why I looked for something else that could help us. We want to be tipped off to the beginning of a rough period, even if that beginning is as sudden as the flash crash. That is when I found the Lentz Volatility indicator on a 15-day MA (denoted LVI 15 for short) seemed to help by letting us include a measure of increasing or decreasing volatility of the $SPX. Incorporating the LVI 15, we came up with revised entry and exit 8

9 rules: Go long the XIV near the end of a rough period when the 9

10 $VXDIF 15 crosses from negative into positive territory and LVI 15 is in positive territory (indicating that volatility seems to be coming down). However, refrain from taking this entry any sooner than 2 months into the rough period. This rule was to prevent us from entering prematurely, and helps deal with the kind of situation like what happened in the rough period following the flash crash, where our signals would have gotten us long the XIV sooner than it was safe to do so. Stay long the XIV as long as $VXDIF 15 is positive. However, you may close earlier after a sustained market advance on signs of increasing volatility as indicated by the LVI 15 showing negative bars. Increasing volatility is usually easy to discern by looking at a price chart. See Figure 3 below where shock tremors were felt a few days prior to the flash crash. Note especially the lower low made during that period and then another lower low. (Figure 3) Figure 3: Historic Chart of $SPX in 2010 with the LVI15 in Lower Chart 10

11 Note that the stronger the $VXDIF 15 is, the more confident we can be in continuing to hold our long XIV position. Numbers higher than are strong and we must resist the temptation to jump out of our position prematurely. The only exception would be, as mentioned, the onset of volatility after a sustained market advance. We will be long the XIV more of the time than being long the VXX, and being long the XIV is where most of our gains will come from. We must see our position through the smaller market corrections. Go long the VXX at the beginning of a rough period, as signified by the $VXDIF 15 falling into negative territory. Close the position when $VXDIF 15 moves out of negative territory. Unfortunately, this does not usually capture the peak price of the VXX, but it is difficult to find anything that can signal the top. In practice, we might decide to take the quick gain that usually presents itself in just a few weeks. If we do that, be satisfied with the gain and wait out the remainder of the rough period without reentering the VXX. You see, the period of time when you want to be long the VXX is very different in nature from the period of time when you are long the XIV. The VXX typically shoots up quickly, reaches a peak and then seesaws downward from there to the point where we get the signal to close it. So, our signal never seems to get us out at an optimal time. For this reason, it might be better to use the dilated pupils test. When you open the quotes display and see that your VXX position has gone very far very fast and for a moment your pupils dilate with greed, then sell. Once you sell, in my opinion it is best to never attempt to re-enter long the VXX during this particular rough period, as the VXX is more likely to go down than up. So, it is best to just sit it out until the signal to buy the XIV comes along. A lot depends upon discerning whether the market is going through a rough period. There were three rough periods during those 3 years: The 6-month period beginning in Sept 2008, the 4-month beginning in March 2010, and the 4-month period beginning in August You certainly know when you re in one, but how can you recognize when one is beginning? Well, a negative $VXDIF 15 tells you for sure. 11

12 Other than that, as I said, it is good to keep an eye on the LVI 15 after a sustained advance, watching for signs of increasing volatility. The flash crash rough period, which was not well signaled by a negative $VXDIF 15, was certainly prefaced by visible tremors in terms of price action. Results of a Refined $VXDIF System Beginning in January 30, 2009, the trades signaled by this approach were as follows: Long/Short Enter Date Enter Price Exit Date Exit Price Days Held Trade Profit Percent Cum NAV 1.00 Long VXX 1/30/ /13/ % 0.96 Long XIV 4/13/ /4/ % 5.99 Long VXX 5/4/ /01/ % 8.08 Long XIV 7/13/ /5/ % Long VXX 8/5/ /25/ % Long XIV 11/25/ (open) % That s times your money in 3.8 years. So clearly, we improved the results by paying attention to LVI 15 and applying one common sense rule not to go short the VXX any earlier than 2 months into a rough period. Two Footnotes: 1) In this study, we dealt with the flash crash and subsequent rough period by assuming we saw trouble coming in late April 2010 and got out at the end of the first bad day going into the crash, May 4, It might have been possible to do better than this but we could have done worse as well. Then, when the rough period seemed to be over I picked the time to get short the VXX as being after the prescribed 2 months had passed and when the indicators looked strong. This was 7/13/10, which turned out not to be an optimal time to buy the XIV because it went down for a few days after that, prior to turning up. 2) In this study, a subjective, voluntary exit from long VXX positions is not assumed. I simply went by the book and used the exit signal. A subjective, voluntary exit may or may not improve the results. The VXX and XIV have a high degree of volatility, and as a result I would not necessarily think of leveraging them up using options since they are already, in a sense, leveraged up. (Note that options are 12

13 available on the VXX but not the XIV.) I suggest that we be content to simply trade the ETNs. This volatility should also be considered as you think of allocating some of your funds to this trading approach. Just to give you an idea, the XIV recently went from 8.30 to and back down to in just 3 weeks. A special note if you are going to try back testing this strategy. There was a 1-for-4 reverse split in VXX on November 9, You would need to adjust the size of your position accordingly when you advance to that date. Some might wonder if trailing stops would help this strategy. I don t tend to think so, but you are welcome to test this on your own. If you find something promising, please let me know! My sense is that the use of trailing stops would only make returns worse. It also raises the question of when it is ok to re-enter a position in the same direction. Daily Roll Yield and Fair Value Proprietary Indexes In addition to the new $VXDIF, we thought it would be nice to show how much the daily roll yield means to your holdings in the VXX and XIV, so we created the $VXXDRE and $XIVDRE indexes. DRE stands for daily roll effect. The $VXXDRE is the effective amount that the daily roll is having on the price of the VXX. For example, at the time of this writing $VXXDRE is -0.08, indicating that the VXX is being pulled down at the rate of 8 cents per day, theoretically. In contrast, the $XIVDRE stands at right now, indicating that the XIV is being assisted at the rate of 6 cents per day, theoretically. The $VXXDRE and $XIVDRE indexes, like the $VXDIF index, have a neutral bias value of 10 and Prev that is always 10, so you can simply focus your attention on the Change value. We also created the $VXXFV and $XIVFV indicators for the VXX and VIV respectively. The FV stands for fair value and you can see what the current fair value of the index is vs. what the market price is. When $VXDIF is positive then Roll yield is working in favor of the XIV and against the VXX When $VXDIF is negative then Roll yield is working in favor of the VXX and against the XIV 13

14 Warning: The VXX and XIV are volatile Be prepared for some volatility. For example, after our clients originally bought in at around 10.7, the XIV dipped down to 8.1 just 5 weeks later (It recovered fairly quickly after that). Still, the use of stops is not recommended. We do not recommend that all of your investment capital be used in the VXX Trading System, but only a portion. What Could Go Wrong? If it is normal times and you are short the VXX or long the XIV, a sudden catastrophe would cause the market to move against your position, and you may need to act quickly to close your position, possibly at a loss. On being short the VXX Many of our clients are attracted to being short the VXX rather than being long the XIV, and even see that being short the VXX all of the time can be beneficial. I want to discuss this idea a little bit. If you are short the VXX, you are in a position that needs to be managed. As the VXX falls, it is necessary to short more in order to keep your capital at work. And if the VXX spikes, you usually need to close out some of your short position as the VXX rises. These adjustments will cost you, as the price where you buy will very often be higher than the price where you sold. In contrast, no adjustments are needed when you go long the XIV. However, the XIV, as we have discussed before, has its own drawback. Every time the $VIX has a spike of any appreciable size (e.g. up 2 points and then back down), the XIV will not return to the price level it was before. It comes up just a little short. This places a drag on the XIV that amounts to a daily roll yield of approximately -0.5 over time. As a result, when you see that the XIV has a roll yield of +0.5, in practice you could very accurately interpret this as zero roll yield. It is not much of a stretch to imagine that this drag on the XIV and the costs of adjusting the VXX position size (especially if adjusting frequently) are counterparts of the same underlying thing, as both are triggered by frequent (and significant enough) price moves in the foundational $VIX. So, both approaches have their drawbacks, but to me, being short the VXX has more. There is the cost of active management, and there is also the risk of total ruin in the event of a catastrophe that causes the $VIX to soar beyond belief. If you are short the VXX you could owe additional money, but if you are long the XIV, your capital simply goes down to nearly zero. 14

15 Trading the VXX: A New Beginning After trading this system for four years, we thought it was a good time to look back and assess the results of the VXX Trading System so far and evaluate the system entry and exit rules to see whether they could be improved. After researching this, we found they could be. More on this later. First the assessment: The VXX Trading System, if strictly followed as originally laid out, generated a 102% gain during the period from April 2012, when the system was first published through March This gain, which amounts to 25.5% annually, is disappointing. The past two years (2014 and 2015) in particular were not good and stand in stark contrast to the first two years. Market conditions were different, as we have seen the bull market of grow tired, giving way to a long period of choppy, sideways action. Knowing that the engine driving this whole approach is roll yield, it made sense to question the validity of always being in a position. There are times when the roll yield is small. Might it be better to be out of the market at such times? We did some back-testing and found that, indeed it does seem to be better to be long the XIV only when roll yield is significantly favorable. We set out to create a new indicator for the VXX Trading System. The result was the Yates VXX Indicator ($YVI), a proprietary indicator. $YVI = $VXDIF 15 +? (the proprietary part) The new trading rules for the VXX Trading System are: 15

16 Remember, you can trade either VIXY or VXX for long volatility or the SVXY and XIV for short volatility. We have traded these rules since March 6, 2016 and through February 12, 2018 and over this period we received a positive return of 315! 4 times our money in just under two years! The chart below shows the S&P 500 Index ($SPX) from 2016 with the new $YVI indicator in the lower chart. The dotted green line corresponds to a reading of When the $YVI is above this line we are long the XIV/SVXY (Short VXX). The dotted red line corresponds to a reading of When the $YVI is below this line we are long the VXX/VIXY. When the $YVI is 16

17 between these lines, we are in cash (no position). You will notice the magenta bars through the lower chart. This is the Yates VXX Danger Indicator ($YVD). It was developed to alert us when unusual volatility moves are happening in the market, giving us a heads up that we may want to close our position, or at least scale it back. You can learn all about this indicator in a video recording on YouTube at: We see these changes as being very beneficial and are encouraged about the system going forward. Trying to second guess the system or introduce other indicators can be detrimental. We need to simply let roll yield do the job for us, and we can do so by following these new parameters. Warning: The Daily Adjustment Factor When volatility jumps up, and then goes back down, this hurts the inverse products such as the XIV. All volatility products move on a daily percentage basis. Let s say volatility goes up 10.0% one day, and the next day returns to its previous level. That would be a 9.09% drop. 17

18 Volatility Cones and Term Structure There has been much discussion lately about volatility ETNs and ETFs and systems for trading them. In particular, I have written about trading the VXX and XIV and launched a VXX Trading Service built right into OptionVue. The success of such trading systems is based to a large degree on the daily roll yield - the day-to-day gain or loss from closing some of the fund's position in the nearby VX futures and opening a corresponding position in the next out VX futures. When a price difference exists between these two contracts, the VXX and XIV (and all other ETNs like them) realize a gain/loss each day they roll a portion of their position. Price differences among the various VX futures contracts reflect what we call the term structure of volatility. When farther out contracts have higher prices than nearby contracts, it is what many call "normal" term structure or "contango". This is the case whenever the market is relatively calm and in an uptrend. The opposite situation occurs when the market is extremely volatile. During such times the VX futures exhibit a "backward" term structure, in which the nearby contracts have higher prices than the farther out contracts. When the VX futures term structure is "normal", the VXX is realizing a loss from each day's roll while the XIV is realizing a gain from each day's roll. When the term structure is "backward", the VXX is realizing a gain from each day's roll while the XIV is realizing a loss from each day's roll. There is no daily roll yield when the VX term structure is flat. VX term structures tend to persist for periods of many months, making it possible to successfully trade the VXX and XIV in positions that do not require frequent transactions. We should keep in mind that for VXX/XIV trading to succeed going forward, we need the VX term structure behavior that has been observed in recent years to persist. In order to get an idea whether this should happen, it would be helpful to gain some understanding of why the VX futures' term structure behaves the way it does. Why do the VX futures' term structures behave the way they do? The best answer, in my opinion, is to direct your attention to what is known in the industry as a volatility cone. A volatility cone is a graphical representation of realized volatility readings 18

19 over different time horizons such as 30, 60, 90, 120 days. The concept of a volatility cone, as initially proposed by Burghardt and Lane, is based on empirical data and depicts the mean reversion tendency of volatility. It puts the current implied volatility into perspective. The chart below shows the volatility cone for the SPX. While it is an older chart, it is an excellent example for our purpose. The concept of a volatility cone, as initially proposed by Burghardt and Lane, is based on empirical data and depicts the mean reversion tendency of volatility. It puts the current implied volatility into perspective. In the graph, the horizontal axis is time and the vertical axis is volatility. What this shows is that an extremely high volatility reading today will, as demonstrated historically, gradually make its way down towards average. By the same token an extremely low volatility reading today will gradually make its way higher. That volatility mean-reverts is practically an axiom, and this mean-reversion tendency is exactly why the VX futures exhibit contango when current volatility is low and backwardation when current volatility is high. Looking at the chart again, you can even imagine that either of the black lines containing triangular or diamond shaped plot points represents the VX futures prices at various durations; hence two possible term structure scenarios. Conceptually this is entirely correct. Since mean-reversion and the volatility cone are foundational, and the cone's predictions relate directly to the term structure of volatility, we can be 19

20 confident that the VX futures' term structure behavior will continue. Note that the term structure is unusually steep these days, as noted in recent articles by Larry McMillan, suggesting that there exists an unusually high demand for portfolio protection by means of buying the VX futures (or indirectly buying them by buying the VXX or similar ETN). In the graph above, it is perhaps like the solid blue line. Special Note on closing of VIX (From February 12, 2018) After a tumultuous week, let s take stock of things. First, let s talk about the XIV. Larry McMillan and other pundits had been warning people all along that the XIV could self-destruct, and yet who thought it might happen so soon? On Monday it actually happened, and it s a good thing we were not in it. (Our system gave a signal to exit on Jan 17 th, several days prior.) Still, our sympathies go out to those who, not following a system, had simply bought the XIV to hold indefinitely. In case you haven t heard, Credit Suisse has issued a statement saying that the XIV will cease trading as of Feb 20th. That takes away our primary instrument for shorting volatility, but leaves the SVXY. As far as we know, the SVXY will continue trading. However, Fidelity has stated that opening trades in the SVXY will not be allowed, and Interactive Brokers has stated that opening trades in the SVXY will not be allowed in retirement accounts. We would remind you that tax accounting associated with trading the SVXY can be more complicated, unless the trading takes place in a tax-sheltered account. These facts may cause some to decide to move their account to another brokerage, or move their money to another account. The VXX trading system will go on. When the markets calm down and the time is right to go short volatility again, there are several ways to do it: Buy SVXY Sell short the VXX Use VXX options to short the VXX. E.g. buy deep ITM puts or buy a deep ITM put debit spread. Buy the ZIV Let s talk about the ZIV. About the same time that Credit Suisse launched the XIV, it also launched the ZIV. The XIV was the short-term instrument and the ZIV was the medium-term instrument. Both are based upon the VX futures. However, the ZIV uses the 2 nd and 3 rd VX futures contracts instead of using the 1 st and 2 nd contracts. (correct?) The ZIV dropped from around 88 to around 65 last week, quite mild compared with the XIV s drop, and Credit Suisse is continuing to support it. However, at the same time, the ZIV does not move upward as fast as the good old XIV during a good run. The ZIV climbs at roughly half the rate compared with the XIV. Those who can buy on margin, and would like the same octane as the XIV, can leverage up. Finally, there is always the hope that some financial organization may decide to launch 20

21 a new product like the XIV. Indeed, even Credit Suisse might do it. Here is a statement from their prospectus. If there is a substantial demand for the ETNs, we may issue additional ETNs frequently. We have placed conditions on our acceptance of offers to purchase the 2x Long VIX Short Term ETNs and the Inverse VIX Short Term ETNs. For more information, see Specific Terms of the ETNs Further Issuances herein. However, we are under no obligation to sell additional ETNs of any series at any time, and if we do sell additional ETNs of any series, we may limit or restrict such sales, and we may stop and subsequently resume selling additional ETNs of such series at any time. 21