 Hey everyone, welcome to another lesson from Navigation Trading. In this lesson I want to talk to you about inverse VIX ETFs. There is a lot of confusion around inverse ETFs in general, but I want to focus specifically on inverse ETFs related to the VIX because they are just a completely different animal. So let's take 30 seconds just to update you on the VIX in general. What is the VIX? It's a volatility index or sometimes called the fear index. It was initially conceptualized back in the late 80s, kind of around the 1987 crash as a way to index uncertainty or fear in the marketplace. And then in the early 90s they updated the VIX with the ticker VIX, which it holds today. And then starting in 2004 they started updating it daily and utilizing the same calculations and methodology that we see in the index today. A few things to know about the VIX is one, it's typically inversely correlated to SPX or the S&P 500 index. The VIX is priced based on options of the SPX and when the S&P 500 is going up, typically the VIX is going down and when the S&P 500 is going down and there's more uncertainty in the marketplace, many times you'll see a spike higher in VIX. Now you can't trade shares of VIX, it's an index just like SPX or RUT, however it does have options that are tradable and they're extremely liquid. Now the pricing of the VIX options are based on the price of the VIX futures. So just to recap, the price of the VIX is based on options of the SPX, but the price of the VIX options are based on the price of the underlying VIX futures contracts. If that sounds confusing, I know it is and that's exactly why we created an entire course all about trading the VIX, it's called how to trade the VIX with 92.3% accuracy and it provides all the details that are beyond the scope of this video. So now let's jump onto the platform and discuss the topic of this video which is inverse VIX ETFs. Here's a list of six different inverse VIX ETFs, ZIV, EXIV, VMIN, XIV, XIVH and SVXY. Now all of these inverse VIX ETFs are calculated a little bit differently so let's take a look at the platform and I'll show you exactly what I mean. Starting with ZIV, if you look up here, we're in the Thinkorswim trading platform, you can see that this one is managed by Credit Suisse and it's an ETN or Exchange Traded Note. Below is a price chart going back about a year and a half at the time of this recording at September 27th, 2018 and what you'll notice is that going back, if you look at all the way through 2016 and 2017 when the market was rallying, you could see implied volatility continued to contract, therefore an inverse VIX ETF did very well. In fact, there were hedge funds and multiple funds made up all around this strategy of simply selling volatility or buying inverse VIX ETFs. Until earlier this year, we saw in the first part of February, the market went down about 10 or 11% and the VIX exploded increasing about 115%. So look what happened to this inverse ETF, it had a high of $94 and within just a matter of days you can see it bottomed out at around $60. So lost nearly 30% of its value just in the matter of a couple weeks. One of the other things that we always want to be aware of is does the symbol have options and are they tradable? In the case of ZIV, ZIV doesn't even offer options to trade. As you know, at Navigation Trading, we're all about trading based on statistics and probabilities utilizing options to make those trades and in this case, ZIV doesn't even have any options. Let's take a look at the next one, EXIV. Again, EXIV has no options either and if you look at the volume of shares traded, we're talking about less than 500 shares traded in one day. If we go back and look at the same thing on ZIV, you've got about 3700 shares trading for the day which is very, very low. These are symbols that I wouldn't even touch with a 10 foot pole because they would just be difficult to get in and out of with very wide bid-ask spreads which eat directly into your profits. But let's take a look at the chart of EXIV and during that same period in early February, there was a high of 61 and it got down to under 30. So lost over 50% of its value in just a couple weeks and remember that's because this has an inverse correlation or an opposite correlation to the actual VIX. So when the market went down and the VIX exploded, this ETF declined significantly over 50%. Let's take a look at the next one, VMIN. If we take a look at the chart, what you'll notice here is that this had an even more magnificent drop, had a high of over $46 and then after the little blip in February, you can see that this one basically is non-existent anymore. Same thing with EXIV and this was the one that got the most press because it had the most dramatic drop. It was over $146 prior to that February drop and then it went down to under $6 at one point and Credit Suisse, who's the manager of this ETN, closed the door and shut it down completely. This one actually had substantial liquidity and was heavily traded, but in this case, people who are buying this and just playing that volatility selling game got hurt really bad and basically lost everything if they own shares of XIV and a very similar story with XIVH. In this case, it had a high of 82, dropped down to a little over $11. It hung around a little bit longer, but ended up getting shut down in June of 2018. Now, SVXY was the most liquid of all of these symbols and if we go to the trade tab in Thinker Swim, you can see these are penny-wide bid-ask spreads if you're buying and selling the underlying symbol. You've got volume that's not great, but it's over 490,000 shares traded and SVXY actually has somewhat tradable options. These are not options that personally I would trade because the open interest on these strikes is under 100 contracts and if you look at the bid-ask spread, you're looking at 212, 235, I mean that's just a wide, wide bid-ask spread. But let's take a look at what happened to SVXY during that February period. It was at over $557 and dropped down into the 50s, losing nearly 90% of its value. One thing SVXY has done since is prior to that February decline in the market, SVXY was not only inverse, but it was also a leveraged ETF, meaning it was tracking the opposite play of the VIX and it was doing it at a 2X level, so it was overly leveraged. Since the February decline in the market they have changed up their calculation and now their inverse exposure is at .5 or half that of the VIX as opposed to 2X that of the VIX. So as you can see, these are extremely dangerous products to be trading and if for some reason you still want to dabble in these and you still want to trade them, here are the main concerns that you want to be aware of going in. Liquidity, you've got to see what kind of volume and open interest they are trading at whether you're buying and selling the actual shares or if there are tradable options on those symbols that you're trading. The other thing to keep in mind is that as you saw, some of those symbols that we were looking at were not necessarily ETFs but they're what are called ETNs or exchange traded notes. The difference is an ETF tracks an underlying index or an ETF, however an ETN is an exchange traded note that is issued by a financial institution like Credit Suisse. So if you're investing in an exchange traded note, you want to be comfortable with the issuer of that note because if they go out of business then you have liability or exposure because you're invested in that note that was issued by that specific bank. Now what's the likelihood of a company like Credit Suisse going out of business? I would say very small but remember back in 2008, Lehman Brothers, Bear Stearns, these were staples on Wall Street and they no longer exist. Anyone who had exchange traded notes issued by them had potential exposure and suffered losses that were unrelated to the actual directional price of the underlying symbol. And lastly, you need to understand leverage. Remember what I said about SVXY, previous to the February decline in the market, they were 2X leveraged of the VIX symbol. After the fact, they changed that to be .5 exposure inversely related to the VIX. If you don't understand this exposure and you don't understand the underlying management of these ETFs or ETNs, you could be exposed to risk that you're not aware of. Make sure you understand the management and leverage of the underlying symbol that you're trading. So what's the alternative if you want to have that specific exposure? If you want to be short VIX, if you want to be short volatility, what else can you do? Well, here's a couple of options. One, you could be long SPX related stocks or ETFs. Remember, the VIX and SPX are inversely correlated. So if your assumption is that volatility is going to contract, then you must also assume that the S&P 500 or related market stocks or ETFs will be going up. So you could simply get long SPX related stocks and ETFs. You could buy SPY, you could buy Apple, you could buy Amazon. There are dozens and dozens of stocks and ETFs that are highly correlated to the S&P 500. Or as we detail in our course, how to trade the VIX with 92.3% accuracy, one of the strategies that we teach is how to use options to trade short positions on VIX related ETFs. Both of these solutions are much better alternatives to trading inverse VIX ETFs. Remember, as successful traders, we never want to put ourselves in a position of potentially getting knocked out of the game. Our goal at Navigation Trading is to always continue to hit doubles and singles and limit your risk exposure so you can continue to trade successfully over the long term. I hope this lesson has helped you get a better understanding of inverse VIX ETFs. If you have any questions, you can always contact us anytime. Happy trading!