Are We Headed Toward Volmageddon Pt. 2?!

Hey Traders,

There’s about to be a new VIX ETP on the block …

But how “new” is it, really?

The SEC gave the go-ahead for two new VIX ETF’s to begin trading …

But for those of you who remember “Volmageddon” in 2018, these “new faces” might look pretty familiar …

In fact, except for a few small tweaks, these are essentially inverse vol ETPs back from the dead!

However … one of the “tweaks” in particular is ESPECIALLY exciting to me, and I plan to make some BIG profits with these new vol products …

Here’s the two VIX ETF’s that got a makeover, and why I’m so excited to trade them.

Volmageddon

Now, before we dive into the specifics of the new ETFs, we need to talk about what happened with their predecessors …

And the part they played in 2018’s “Volmageddon.”

Let’s start by looking at VIX exchange traded products (ETPs).

After all, you’ve probably heard me talk about ETPs like ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) and iPath Series B S&P 500 Short-Term Futures ETN (Ticker: VXX).

These are two of my favorite “easy money” ETPs to trade … when the time is right, anyway.

VXX offers exposure to short-term VIX futures, while UVXY offers 1.5 times leveraged exposure to short-term VIX futures.

Typically, we can count on these ETPs to move lower.

Why?

VIX futures must equal the VIX index by the time they expire, and during normal market conditions, VIX futures trade above the VIX index. 

So that means that we can usually count on VIX futures falling as they near expiration.

Therefore, we can assume that an ETP that provides exposure to VIX futures will also fall …

And it does!

When adjusted for all the reverse splits (one of which we just saw this past May), UVXY used to trade at the equivalent of $2 million!

… It’s currently at $17.58.

Of course, it’s not always a clear-cut downtrend. When you look at the day-to-day of the chart, there are definite pops and drops that makes trading UVXY not quite as simplistic as it sounds.

And just so you see UVXY isn’t a one-off, here’s VXX:

You see it still has the same general downtrend (with the occasional vol spike).

In the years leading up to the 2018 vol spike, markets were relatively calm …

The S&P 500 was on a steady trek higher, and the VIX was maintaining low levels.

Sure, that chart might look anything but calm, but notice how the high is only in the mid-17s!

That’s a low VIX.

So with a low VIX, VIX futures are going to fall into expiration …

So naturally, an ETF that allows you to profit on a low VIX would be the perfect way to rake in some extra money!

But … UVXY and VXX fall. They certainly aren’t a “buy and hold” type of deal. You can definitely profit off of them, but it’s typically through more active trading like put options.

So someone had the bright idea to offer INVERSE VIX ETPs.

In other words, the same way you can count on UVXY and VXX to go down, a product that offers inverse exposure, you should be able to count on going up, right?

The inverse of VXX was VelocityShares Daily Inverse VIX Short-Term ETN (Ticker: XIV), which allows investors to essentially short VIX futures — sounds like an easy way to profit in a calm market, right?

Well, like every other “easy money” trading strategy … it works until it doesn’t.

And Volmageddon is what happens when it doesn’t.

Self-Destructing In 3 … 2 … 1 ….

In February of 2018, markets had been coasting on cruise control for quite some time, and volatility was similarly mellowed out.

Then, on Friday, February 2nd, markets started to slide, and traders got worried …

Nothing too out of the ordinary …

But by Monday, the market rout truly started, and the VIX popped a whopping 115% in a single day:

This was a HUGE problem for the inverse volatility products like XIV, and a handful of others.

What could have been a brief market correction turned into a historic sell-off, with the S&P 500 experiencing one of its fastest 10% declines in its history …

And inverse volatility products, including XIV, ProShares Short VIX Short-Term Futures ETF (Ticker: SVXY), and VelocityShares Daily 2x VIX Short-Term ETN (Ticker: TVIX) plunged by 90% or more in a single day.

One of the big causes for this self-implosion XIV had to do with its Trade At Settlement (TAS) method of rebalancing.

Essentially, in order to rebalance at the end of the day, XIV and other inverse VIX ETPs had to purchase huge amounts of front and second month VIX futures.

This sudden surge in demand caused futures to rocket sky-high … thus forcing XIV to buy even more.

This vicious cycle caused XIV’s value to plunge from $1.9 billion to a mere $63 million essentially overnight.

While a handful of inverse VIX products — like SVXY and TVIX (which was delisted in 2020) — were able to modify their inverse exposure and survive, XIV was shortly after closed by Credit Suisse, leaving investors to swallow huge losses.

But now … XIV and TVIX are rising from the dead.

Guess Who’s Back?

VelocityShares has decided it can’t leave well enough alone (I’m partially kidding …) and after getting the green light from the SEC, it is reviving two of the riskiest VIX products the market has ever seen …

With a few modifications, of course.

This time around, both products will be Exchange Traded Funds — ETFs — so they’ll be based on actual underlying assets, unlike ETNs.

And to prevent problems like Trade At Settlement procedures, which encourage traders to get in and out of positions by a cutoff time, these new ETFs will use volume weighted average pricing to help smooth out sudden spikes and dips in the market, and prevent the self-destructive cycles like we saw in 2018.

Now, what I’m interested in is the fact that these are ETFs …

Because ETFs have options, and I FULLY plan to trade them!

Like UVXY and VXX, I’ll be able to practically print money with these vol products, given the right conditions!

And with options, we’re not taking on the full risk of owning shares of these ETFs outright … which, as you just saw, is a HUGE benefit.

Before you get too excited, remember, like any volatility ETP, these products should be “handled with caution” and you must use strict risk-management if you want to trade them.

I also recommend having a very firm grasp on volatility, the VIX, and VIX futures if you want to dip your toes in as well.

However, I fully plan on making some big bucks with these things, and I will keep you updated as we get closer to listing!

Your Only Option,

Mark Sebastian


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