The TVIX mirrors a 200% move in the VXX. These two ETN’s can be incredibly lucrative trading vehicles if traded properly. There is a very important difference between an ETN and an ETF. An ETN is an “Exchanged Traded Note”, which contains investment products issued by a bank or institution. An ETF is an “Exchange Traded Fund” and contains actual securities. ETN’s use futures, derivatives and options to mirror their underlying instruments. One of the two most important factors that an investor or trader needs to be aware of is backwardation and contango. When the VXX is in backwardation that means that spot prices exceed forward prices and in contango forward prices exceed spot prices. When you get big run ups in volatility, curves get skewed towards backwardation which is exactly what happened from August to October in 2011. The VXX was up over 150%. When the premiums for put protection came down, the VXX cratered and went from $50 to $27. Meanwhile during this time period, the Inverse Volatility (XIV) ETN has rallied over 90%. Think of normal market conditions as equilibrium between where the backwardation and contango curves intersect. As outliers occur, such as the August crash, this equilibrium gets stretched. This is where the most money is to be made. A $55 high on the VXX on October 3, 2011 was made when the ^Vix hit $45 that day. Only once in history has the ^Vix hit $45 and been higher two months later. The only time was in 2008 when the ^Vix ran to $90. “I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.” – Paul Tudor Jones.
