Hey Traders,

Yesterday was the official launch of not one, but TWO new VIX exchange traded products (ETPs).

But before you run off to start buying, selling, and trading these new ETPs on the block …

There’s some things you REALLY need to know.

Here is what they are.

First, let’s look at a few current vol products, and talk about how they work.

Two that we talk about a lot here are VXX and UVXY.

(You may remember VXX has faced some struggles lately …)

The whole point of VXX is to replicate a VIX future that has a constant duration of 30 days.

This means that VXX keeps a balance of front-month and second-month futures, and swaps them out to keep a constant duration.

For example, right now the VXX basket should be about 75% VIX futures and about 25% May futures. As we get closer and closer to April expiration, VXX will continue to sell April futures and buy May.

Now, this presents a problem because VIX futures are usually in contango – with futures trading progressively higher over spot.

But the front-month VIX future MUST equal the cash VIX at expiration.

So, when we are in contango (which again, is most of the time), VIX futures are consistently decaying to equal spot VIX.

Which means a VIX ETP like VXX is constantly buying high, and selling low.

Over time, VXX and UVXY (which provides 2x leveraged exposure to VIX futures) hemorrhage value like you wouldn’t believe …

But intraday, it behaves as it should; that is, it tracks the performance of a VIX future with 30 days to expiry.

Now, while VXX and UVXY typically lose massive amounts of money over time …

There used to be a product called VelocityShares Daily Inverse VIX Short-Term ETN (Ticker: XIV), which was essentially the inverse of VXX. 

In other words, it allowed investors to short VIX futures.

If going long VIX futures was a sure way to lose money, doing the opposite would yield profits, right?!

It worked … for a while.

Then it went very, very wrong.

During what has now become known as “Volmageddon,” in 2018 a slight market sell-off became a huge correction after the VIX popped 115% in a single day.

This was very, very bad for short VIX futures products, like XIV (and a handful of others), and XIV plunged more than 90% in short order, and XIV was shut down shortly after (leaving many investors out significant sums of money).

(There’s a few more details on Volamageddon right here.)

This brings us to today (well, yesterday), when two new volatility products made their way onto the market …

1x Short VIX Futures ETF Fund (Ticker: SVIX) and 2x Long VIX Futures ETF Fund (Ticker: UVIX).

SVIX is essentially the same as XIV, providing 1x short exposure to VIX futures.

VelocityShares, who is responsible for these two ETPs, seems to think it has worked out the “issues” that led to XIV’s demise.

In spite of XIV’s disastrous end, there seems to be plenty of traders willing to give this new iteration a go, with more than 200,000 shares crossing the tape.

I will be hopping on board the options once they are listed.

As for UVIX, it provides 2x leveraged long exposure to the index VXX is based off of. 

This means, like VXX and UVXY, we can expect UVIX to be a massive wealth-destroyer.

For example, UVIX is essentially what UVXY was up until 2018 …

And split-adjusted, UVXY has fallen from $2 billion (yes, billion with a “b”) per share to about $12.50.

When I say these long VIX futures products are “massive destroyers of wealth,” I am not messing around.

But … for options traders like us, they can also be massive CREATORS of wealth …

Because they do track volatility well intraday … you just don’t want to hold them for any longer than a few hours at a time.

Once options are listed for both SVIX and UVIX .. you can bet I will not wait too long to hop on board, and start raking in some wins.

(If you join me in Volatility Edge, you’ll be the first to know when I make my move!)

Your Only Option,

Mark Sebastian