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How Do Bitcoin Futures Work?

Sunday, January 21st, 2018 | Vance Harwood

The CME and Cboe/CFE, two large, well respected, USA regulated futures exchanges, recently started trading Bitcoin futures. These venues make it possible to trade on Bitcoin’s value without being exposed to the uncertainties of the mostly unregulated Bitcoin exchanges.

To understand Bitcoin futures you need to recognize, among some other things, that these futures are not in the business of predicting Bitcoin’s price.

Bitcoin Futures are Not Trying to Predict the Future!

It’s reasonable to assume that a product named a future is attempting to predict the future. For Bitcoin futures, this is definitely not what they deliver. The core utility of the futures markets is not predicting the future prices of their product but rather the secure delivery of a product at a known price, quality, and date. If there’s product seasonality (e.g., specific harvest times) or foreseeable shortages/abundances then future’s prices may reflect that but neither of these factors applies to Bitcoin.

I’m not saying that Bitcoin futures won’t be used by speculators making bets on Bitcoin—they certainly will be— but when you see Bitcoin futures trading higher or lower than the current Bitcoin exchange values (spot value) it’s not a prediction—it’s a reflection of the inner workings of the futures market.

How Are Bitcoin futures prices established?

If you look at the quotes for Bitcoin futures you’ll see at least three things, the expiration code (shorthand for a specific expiration date ) the bid (buy price) and the ask (sell price). If you’re ever confused as to which one to use in your situation it’s easy to sort out—start with the price that’s worse for you.

Important agents interacting with those prices are operating in one of three roles: individual speculator, market maker, or arbitrageur. A key role is market maker—a firm that has agreed to simultaneously act as both a buyer and seller for a specific security. When companies sign up for this role they agree to keep the bid/ask prices relatively close to each other—for example even if they aren’t keen on selling Bitcoins at the moment they can’t just set the ask price to an outrageous level. The agreed-upon maximum bid/ask ranges might be tied to market conditions (e.g., wider when deemed a “fast market”) and might allow time-outs but in general, the market maker agrees to act as a buffer between supply and demand.

The Market Makers

The existence of market makers (e.g., Virtu Financial) refutes a common assertion about futures—that there‘s always a loser for every winner, that it’s a zero-sum game. It’s true that derivatives like stock options and futures are created in matched pairs—a long and a short contract. If two speculators own those two contracts the profits on one side are offset by losses on the other but market makers are not speculators. In general, they’re not betting on the direction of the market. They act as intermediaries, selling to buyers at the higher ask price and buying from sellers at the lower bid price— collecting the difference.

Market makers are challenged in fast markets—when either buyers or sellers are dominating and prices are moving rapidly. When this happens market makers are obligated to continue quoting bid and ask prices that maintain some semblance of an orderly market. If they start accumulating uncomfortably large net long or short inventories they may start hedging their positions to protect themselves. For example, if they are short Bitcoin futures they can buy Bitcoin futures with different expirations or directly buy Bitcoins to hedge their positions. The hedged portion of the market maker’s portfolio is not sensitive to Bitcoin price movements—their profit/losses on the short side are offset by their long positions.

The market maker’s ability to hedge out their exposure demonstrates that futures aren’t inherently a zero sum gain. They can accommodate the market and still be profitable—regardless of the market’s direction.

The Arbitrageur

The arbitrageur is hyper-focused on the price difference between the Bitcoin future and the exchange price. If those prices differ enough they can lock in risk-free profits. You can imagine how much capital is available if risk-free profits are in the offing…

The arbitrageur very carefully calculates the costs of buying or shorting Bitcoin futures while selling short or buying actual Bitcoins.

These calculations include:

      • Time value of money required for margin deposits
      • Fees
      • Transaction costs (bid/ask spread)
      • Contract expiration settlement price risk (Bitcoin futures are cash settled)
      • Borrow costs for shorting Bitcoin if going short
      • The amount of profit that their bosses expect from them.

Normally commodity futures arbitrageurs have to account for things like storage costs (e.g. warehouses, silos), insurance (in-case the storage facility is robbed or burns down), and seasonal price variations but none of these apply to Bitcoin, so somewhat ironically the crazy Bitcoin market is simpler for them.

Knowing their estimated costs and profit requirements the arbitrageur determines a minimum difference they need between the futures’ prices and the spot price before they will enter the market. They then monitor the price difference between Bitcoin futures and the Bitcoin exchanges and if large enough they act to profit on that gap.  For example, if a specific Bitcoin future (e.g., February contract) is trading sufficiently higher than the current Bitcoin exchange price they will short that Bitcoin future and hedge their position by buying Bitcoins on the exchange. At that point, if they have achieved trade prices within their targets, they have locked in a guaranteed profit. They will hold those positions until contract expiration (or until they can cover their short futures and sell Bitcoins at a profit).

They’ll do the complementary transaction if the price of a specific future is enough lower than spot price. They’ll buy futures and short Bitcoins to lock in profits in that case.

Arbitrageurs provide a critical role in futures markets because they’re the adults in the room that keep futures prices attuned to Bitcoin exchange prices. If there are multiple futures providers (Cboe and CME in this case) they’ll also act to keep the futures from the various exchanges aligned with each other.

If Bitcoin futures prices get too high relative to spot arbitragers are natural sellers and if the futures prices get too low they are natural buyers. Their buying and selling actions naturally counteract price distortions between markets. If they’re somehow prevented from acting (e.g., if shorting Bitcoin was forbidden) then the futures market would likely become decoupled from the underlying spot price—not a good thing.

The Term Structure

A key attribute of a futures market is how its contract’s prices vary by expiration date. The succession of futures prices over time is called the “term structure”. If supply is stable (no seasonality or shortages) then typically futures prices will increase with expirations further in the future. This term structure configuration is called “contango” and it accounts for the fact that carry costs (e.g., time value of money) and profit expectations increase with time. Unless there are big changes in interest rates or the way that Bitcoin exchanges work I expect the level of contango in the Bitcoin futures term structure to be small. Bitcoins don’t cost much to hodl (once you have your hardware wallet) and there’s no apparent seasonality. The chart below from VIX Central shows a typical Bitcoin term structure (click on chart to get current data):

Cboe vs CME: Sizes & Settlement

There are two USA regulated Bitcoin futures exchanges in operation. The CME’s contract unit is five Bitcoins whereas the Cboe’s contract unit is one—that’s the biggest difference between these futures. The upfront money to buy or sell short a CME contract will be about five times higher than the Cboe contract. Larger investors won’t care but this will be an issue for smaller investors. Another difference is the spot/settlement process that the exchanges use. In the case of Cboe futures, the contracts will be settled to a 4 pm ET Gemini exchange auction price on the day of expiration, for the CME futures the settlement price is a complex calculation using an hour of volume weighted data from multiple exchanges (currently Bitstamp, itBit, Kraken, and GDAX). With the CME’s approach, it will be harder to manipulate the settlement price but it doesn’t give arbitrageurs a physical mechanism to trade their positions—possibly an issue.

There’s nothing to prevent people from closing out their contracts before final settlement but typically there is some premium remaining until the very end.

Unlike many commodity futures, Bitcoin futures are cash settled rather than physically settled.  Cash settlement is a relatively new development in futures trading, first introduced in 1981 for Eurodollar futures, that addresses the problem of how to settle futures contracts on things that are difficult/impossible to deliver physicially—things like interest rates, large stock indexes (e.g., S&P 500), and volatility indexes (Cboe’s VIX).  Futures physical settlement involves actual shipment/change of ownership of the underlying product to the contract holder but in practice, it’s rarely used (~2% of the time).  Instead, most organizations that are using futures to hedge prices of future production/usage will make separate arrangements with suppliers/customers for physical delivery and just use the futures to protect against contrary price changes.  In practice, the final settlement price of the contract can be used to provide the desired price protection regardless of whether the futures contract specifies physically delivery or cash-settlement.

While “physical” delivery of Bitcoins as part of a futures contract would certainly be possible it raises regulatory and security issues in today’s environment where the cybercurrency exchanges are mostly unregulated, somewhat unreliable, and theft due to security hacks is distressingly common.  By selecting cash settlement the CME and Cboe completely avoid the transfer of custody issues and shift those problems to somebody else—namely the market makers and arbitrageur.


One traditional attraction of trading futures is the ability to use relatively small amounts of money to potentially achieve outsized returns. In many futures markets the margin, the amount of money that your broker requires up-front before executing the trade can be quite small compared to the ultimate value of the contract. For example, as of 22-Dec-2017, each E-mini S&P 500 contract was worth $134K ($50*S&P 500 index value)—this “list price” of the contract is called its notional value.  The CME only requires you to maintain a minimum margin of $4.5K (3.4% of notional) to control this contract (brokers often require additional margin). Margin requirements this low are only possible because the volatility of the S&P 500 is well understood and your margin account balance is adjusted at the end of every trading day to account for the winnings or losses of the day. If your account balance falls below the margin minimum of $4.5K you’ll need to quickly add money to your account or your position will be summarily closed out by your broker. On the plus side, if you’ve predicted the S&P’s direction correctly your profits will be that same as if you completely owned the underlying stocks in the index. A +1% daily move in the S&P500 would yield $1340 in profit even though you only have $4500 invested— a 29% return—this multiplier effect is called leverage.

Currently, Bitcoin futures have very high margin requirements. The Cboe requires 40% of the notional amount for maintenance margin, the CME requires 43%. Your broker will likely require more than that. The culprit behind these high requirements is Bitcoin’s high volatility—until that calms down the exchanges will protect themselves by requiring a bunch of up-front money. If you don’t come up with the money for a margin call they want to close out your position without leaving a negative balance.

Because of the high margin requirements, Bitcoin futures don’t offer much leverage compared to just buying Bitcoins outright. However, Bitcoin futures do offer the trader time-tested exchanges that are not nearly as susceptible to hacks, thefts, and unscheduled downtime.


In the movie “Trading Places,” there’s a wild scene where fortunes are made and lost in the orange juice future pit in a matter of minutes. This scene epitomizes what most of us envision futures trading to look like. The movie depicts a situation where the supply of oranges from the next harvest is unknown—and that is the source of the craziness.

Bitcoins don’t have seasonal variabilities—supply is a known quantity. This supply stability makes Bitcoin futures a lot less dramatic but in the case of Bitcoins this is a real plus—there’s already plenty of drama in the exchanges—the futures market will be the safe and quiet space. A different sort of trading places…

How do VelocityShares’ EVIX and EXIV Work?

Monday, May 21st, 2018 | Vance Harwood

In May 2017 VelocityShares introduced two volatility funds, EXIV and EVIX, which track European volatility futures.  In digging into these funds I’ve encountered a dense mashup of the familiar and the foreign.  The differences between European Volatility futures and VIX futures are relatively small so it’s reasonable to view EXIV and EVIX as close cousins of ProShares SVXY and Barclays’ VXX, however, these funds depend on a set of securities and processes with subtle and not so subtle differences with the mainstay USA volatility funds.

If you are not familiar with VIX futures based volatility Exchange Traded Products (ETPs) then I recommend you first take the time to read these posts on ProShares’ SVXY and Barclays’ VXX before you tackle these new arrivals.  One thing to remember is that after the February 5, 2018 “Vol Tsunami” SVXY’s leverage factor was lowered by Proshares from -1.0X to -0.5X of its reference index.  EXIV’s leverage factor remains at -1.0X.

Some Basics

  • EVIX is a short-term long volatility fund that will tend to go up if European stocks go down significantly.
  • EXIV is a short-term inverse volatility fund that tracks the opposite of EVIX’s percentage moves on a day only basis. Because EXIV adjusts its assets at market close to achieve its daily tracking goal it does not behave like a true short of EVIX—which can be a good thing or a bad thing depending on the market moves.
  • The Swiss bank, UBS AG, is the issuer of both of these Exchange Traded Notes (ETNs). They are structured as unsecured long-term debt securities.  As of May 2018, Moody’s rating of UBS’ long-term debt was: “A1 Possible Upgrade”  The investor fee charged by UBS AG is 1.35% annualized for EVIX and EXIV, this compares to 0.95% for SVXY and 0.89% for VXX.
  • The European Volatility futures that these funds track settle at expiration to the European volatility index VSTOXX. VSTOXX uses a methodology very similar to the CBOE’s VIX but instead of being based on the prices of S&P 500 (SPX) options the VSTOXX is based on STOXX option prices.
  • The STOXX index is comprised of 50 of the largest companies in the Eurozone and is capitalization-weighted like the S&P 500. It does not include companies from the UK. These 50 stocks represent around 60% of the Eurozone stock market value. In comparison, S&P 500 represents around 80% of the total USA stock market capitalization. Similar to the S&P 500 index, the STOXX index does not include dividends, so the returns of actually holding the constituent stocks would be higher than the index indicates.  For the last 5 years, the STOXX dividends have averaged 2.5% vs 1.9% for the S&P 500.
  • EVIX and EXIV track indexes (VST1MSL & VST1MISL respectively) that theoretically hold a mixture of the two VSTOXX futures nearest to expiration. The mixture gives an expiration horizon of 30 days, similar to the VIX future based short term volatility funds like VXX and SVXY.  These funds are fully divested out of expiring futures the day before their expiration/final settlement.
  • Both funds effectively do a daily end-of-day rebalance that adjusts the number of volatility contracts that they hold in order to maintain a 30-day average horizon. At the same time EXIV also does an asset rebalance such that its daily percentage move will closely match the opposite of EVIX’s next day daily percentage move (see How Does SVXY Work? for more on this).


  • Standard processes and rough equivalences in key securities


Generic Securities


European Version USA Version Standard Processes
Volatility Futures VSTOXX futures VIX futures Settlement
30-day Volatility Index VSTOXX VIX Index calculation
Large Cap Stock Index STOXX 50 S&P 500 Stock index selection
Large Cap Stock Options OESX SPX Settlement, Cash Settled, European exercise


    • The key European securities and processes are similar to the USA markets but in no case have I found a pair of processes that are identical. For example, VIX futures settle to a special opening quotation of the CBOE’s VIX® soon after market open on expiration days whereas VSTOXX futures final settlement price is determined by the average VSTOXX index level between 11:30 and 12:00 CET on the day of expiration.
    • A significant difference between the VIX and the VSTOXX index is that the VSTOXX calculation does not incorporate options with bid prices below 50 Euro. This contrasts with the VIX’s calculation which uses options with bids as low as $5—which increases the chances that an institutional player might attempt to influence the VIX’s settlement value in their favor by buying or selling cheap out-of-the-money puts.
  • Quotes / Historical Data
    • While free quotes for EXIV and EVIX are easy to get with the usual sources (Online brokers, Yahoo, Google), obtaining quotes for the underlying securities/indexes is tougher. The ones I’ve found so far are:
    • STOXX
    • VSTOXX (ticker V2TX or DVY00)
    • VSTOXX Futures
    • VST1MSL (EVIX’s dollar denominated index)
    • VST1MISL (EXIV’s dollar denominated index)
    • Intraday Indicative value (IV) quotes for EXIV and EVIX are available from some brokers and Yahoo Finance. The symbols within Yahoo are ^EXIV-IV and ^EVIX-IV


  • Hours
    • Typically the European continent is 6 hours ahead of USA Eastern time. Standard closing time on the European continent exchanges is 5:30 PM, so they are closing at 11:30 Eastern time. The IV values for EXIV and EVIX don’t update after 11:30 ET because the OESX options used to compute VSTOXX are not trading past then. The Yahoo finance chart below illustrates EXIV’s IV value flat-lining during the afternoon.
    • The VSTOXX futures referenced by these funds trade from 7:30 to 22:30 CET.


  • Termination risk
    • EXIV will terminate if there is a large enough volatility spike.  Once thought by some to be unlikely the termination of XIV in February 2018 demonstrated that this can happen. The funds are guaranteed to not go below zero and the issuers will not commit extra capital to meet margin calls in that sort of extreme situation.  In EXIV’s case, the fund will be automatically terminated if the drop in the intraday IV value is 75% or more from the previous day’s close.  For the USA markets, historical data suggests it would take a VIX intraday spike of at least 80% to result in a 75% drawdown in the inverse volatility funds and I suspect that the VSTOXX/ VSTOXX futures sensitivities are similar. In the case of termination, shareholders would receive a final share value reflecting the net value of the fund a few days after the triggering event.  The value is not guaranteed to be 25% of the previous day’s value, it is only guaranteed to be zero or higher.

Comparing Markets—and Indexes

The chart below compares the historical values of the S&P 500 and the STOXX as well as the VIX and VSTOXX since January 1998.

  • A few things stand out when looking at the STOXX (red line)
    • The STOXX fully participated in the 2000 dot-com crash and the 2008/2009 bear markets
    • The STOXX is still well below its 2000 highs—the lack of recovery in the STOXX after the 2008/2009 financial crash is striking
  • Looking at VSTOXX (purple) vs the VIX (black) above:
    • The VSTOXX shows mean-reverting behavior similar to the VIX. Sharp spikes up are followed by fairly rapid decays towards the mean values.
    • Periods of low volatility can persist for a long time but eventually, the VSTOXX reverts back to values closer to the mean
    • Generally, the VIX and the VSTOXX are closely correlated
    • The VSTOXX value is almost always higher than the VIX’s value
  • Some statistics for the S&P 500 and the STOXX, January 1999 through July 2017:
Compound Annual Growth (dividends not included) 3.75% -0.25%
Annualized Volatility (365 day year) 23.4% 28.1% (20% higher than S&P 500)
Worst Case Drawdown -56% (2009)


-65% (2003)
Correlation of % moves 0.54 (moderately high) between S&P 500 and STOXX


  • Statistics for the VIX and the VSTOXX, January 1999 through May 2018
Average 20.05 24.40 22% higher
Median 18.2 22.54 23% higher
Low 9.14 10.68 14.5% higher
High 80.86 87.51 8% higher
Annualized Volatility

(365 Day Year)

129.3 114.42   13% lower
Value Correlation .905 (high) between VIX and VSTOXX values
Correlation of % moves 0.544 (moderately high) between VIX and VSTOXX % moves
Biggest one day drop -29.5%  (10-May-10) Flash Crash aftermath -35.2%  (24-Apr-17) Le Pen defeat
Biggest one day spike +115.5% (5-Feb-18) “Vol Tsunami” +38.8% (24-Aug-15)  China scare II
Mode (most common value)  [0.1 pt bins] 13.3 23.1


The chart below shows a histogram of values for the VSTOXX and the VIX

  • A few observations:
    • The VSTOX distribution is shifted notably higher in value than the VIX
    • While the two index distributions have truncated left “shoulders” and big fat tails on the right the VSTOXX has a significantly more balanced distribution around its mean compared to the bottom-heavy VIX.
    • The difference between the mode (the most common value rounded to 0.1 pts) and the record low is only 45% with the VIX compared to 116% for the VSTOXX


Historic Performance

  • By using a simulation starting in June 2009 of EXIV and EVIX  we can get a feel for their performance relative to SVXY and VXX.  The chart below shows relative performance when starting with portfolios of $10K fully invested in each of the funds.


  • The two lines starting high on the left (red and blue lines) are long volatility funds that reference the left axis scale. The long volatility funds exhibit the typical long volatility fund race to zero, with VXX slightly better at losing value.
  • The two inverse volatility funds (green and purple lines) referencing the right scale perform much better than the long funds. Overall the -0.5X SVXY’s performance is better with an approximate 12X growth since 2009.  Both funds lost approximately 50% of their value in the February 5th, 2018 volatility spike.

Using a log scale on the vertical axis provides a more accurate visual way to judge relative performance. The first chart shows VXX index vs the EVIX index


  • The two portfolios begin diverging in early 2010 and don’t return to a similar loss rate until 2016.
  • Over the 2010 to 2015 period EVIX’s decay rate was significantly lower than VXX’s. It’s likely that the VSTOXX futures had considerably lower contango levels during that period compared to the VIX’s futures
  • Looking at the inverse volatility side of things EXIV lagged SVXY until around 2015.  At that point, the improvements in the European markets fueled a strong period of contango driven growth in EXIV.

The chart below, starting in January 2016 more clearly shows how EXIV has outperformed the  -0.5X SVXY in the last couple of years. The non-leveraged long USA and European based funds have tracked each other relatively closely over that same period.  The chart below shows the result of the simulation.

When to Use These New Funds

  • An obvious application for these new funds is placing a bet on an upcoming European event with potentially major impact (e.g., a Brexit vote, or the Le Pen / Macron election). In “known/unknown” cases like this the date of the event is well-known, but the result is uncertain and potentially economically impactful.  It’s certain that the VSTOXX will go up before an event like this, the interesting, and potentially lucrative question is what will happen to volatility after the event—panic/distress or a collapse back to the status quo.
  • Diversification is another application. Obviously, the European markets are not in lockstep with the USA markets and this distance will tend to smooth out some of the volatility shocks.
  • Having EVIX and EXIV gives traders a way to profit if they see an upcoming convergence or divergence between the volatility indexes in the two markets. For example, if you believe a recent volatility jump in USA markets will propagate to Europe you could do a straight EVIX purchase or a pairs trade between EVIX and a long volatility fund like VXX.
  • It might be possible to do some form of contango arbitrage with these funds. It’s certain that the contango losses/gain won’t be identical between the two sets of futures markets, a pairs trade might allow a trader to profit from the difference in contango rates with an overall reduced risk exposure.


  • There are differences in the trading hours of these two markets. On the USA side of things, the Intraday Indicative (IV) quotes will be frozen on EVIX and EXIV past the normal close of the European markets, depriving us of an important piece of trading information that’s useful for trading low volume ETPs like these. On the European side, we have times when the volatility securities are trading while the USA markets are closed. For example, you might want to close out EXIV positions if the STOXX was crashing, but if the USA markets are closed there would be no direct way to do that.
  • Since VSTOXX futures are denominated in Euros and EVIX/EXIV are dollar-denominated, exchange rate changes will have effects, although compared to the normal hysteria of volatility markets I doubt it will be significant. Since EXIV is effectively short VSTOXX futures the impact of currency rate changes will be in the opposite direction of EVIX which holds long positions.
  • The EVIX/EXIV calculations assume that cash not needed for margin on the futures will be “invested” in short term German treasury bills—which have been running at negative interest rates (May 2018 -0.33%). Negative rates will result in a minor drag on these fund’s values.
  • Options are available on EVIX, but not on EXIV. You might guess that the CBOE shies away from options on inverse volatility funds because of their termination risk, but options are offered on ProShares’ SVXY so this argument doesn’t hold up.  My understanding is that the SEC has a blanket prohibition on options for leveraged (-1X or 2X on up) Exchange Traded Notes (ETNs).  This seems a bit arbitrary, the big banks that issue the ETNs typically have investment grade credit ratings, but ETFs do have the advantage of transparency into what assets the issuer is actually holding.


It’s head spinning to introduce a whole new set of securities and indexes into the already confusing area of volatility investing but as I reviewed the different ways to use EVIX and EXIV it appears well worth the trouble to learn a few new things. These funds open up new volatility based opportunities in geographic-based investing, diversification, and arbitrage style trades.

How Does VMIN Work?

Tuesday, February 27th, 2018 | Vance Harwood


As of March 7th, 2018 VMIN will shift its trading strategy to use longer-term VIX futures with 2 to 6 months until expiration in addition to it holdings of short term volatility Exchange Traded Funds.  Details are still unclear but I’m estimating that this new strategy will result in a leverage factor of around -0.7X of the short term index futures index SPVXSTR that VXX is based on. This change was likely in response to the events of February 5th, 2018 when a massive VIX futures spike occurred in the last 30 minutes of trading. This change to VMIN will make it less susceptible to a termination event if VIX futures were to increase 100% or more from the previous day’s close.  This leverage change will likely reduce VMIN’s performance when VIX futures are in contango and reduce its price decreases when VIX futures fall.  I have not updated the content of the post below to reflect the strategy—I will when the details of the change become clearer.  REX ETF Press Release


In May of 2016, REX Exchange Traded Funds introduced two volatility oriented products, VMIN and VMAX.  One is a bet on market volatility staying the same or dropping (VMIN) and VMAX is essentially its mirror image—betting on short term volatility increases. VMIN has some important structural and performance related differences that distinguish it from the other short term inverse volatility funds—VelocityShares’ XIV and ProShares’ SVXY.

In this post I focus on VMIN’s differences from its competitors. If you are new to inverse volatility investing I suggest you review the fundamentals by reading How Does XIV Work? and How does SVXY Work?

For a good understanding of  VMIN (full name: REX VolMAXX™ Short VIX Weekly Futures Strategy ETF) you need to know how it differs from other inverse volatility funds, what it tracks, its risks to the investor, and how well it has performed.

How Is VMIN Different From a Performance / Tax Standpoint?

  • Far from being a “me-too” product, VMIN differs from its SVXY and XIV competitors in a number of important ways. One key difference is that VMIN is designed to track the daily moves of the CBOE’s VIX® better than existing securities. VMIN is an inverse fund, so it generally moves in the opposite direction of the VIX.
  • In addition to this improved tracking, VMIN also outperforms its competitors in taking advantage of the structural drag of VIX futures when their term structure is in contango. Contango exists when longer-dated VIX futures are priced higher than VIX futures that have less time until expiration. The VIX futures that underlie the volatility Exchange Traded Products (ETPs) are in contango around 75% of the time. In the May 2016 to March 2017 time period, VMIN outperformed its completion by 28% due to this characteristic, more than tripling during that period. In fact, VMIN was the best performing fund in the ETP universe in the first quarter of 2017, outperforming all other 23,788 funds, with a 35% gain.
  • While VMIN is an Exchange Traded Fund (ETF) like SVXY, its tax reporting is the same as an ordinary equity investment with your short and long-term capital gains reported via 1099 forms. Because SVXY holds VIX futures directly tax laws require that it be treated as a partnership, reporting gains/losses via Schedule K-1 forms. While not a huge deal; K-1 forms are complicated and always seem to arrive very late in the spring.
  • VMIN will make distributions of any realized securities gains at least once a year. In a good year this special dividend will likely be substantial (for FY 2016 it was $9.92/share). Neither XIV nor SVXY distributes capital gains this way—they have different legal structures (Exchange Traded Note and an ETF structured under the Securities act of 1933 respectively). Special dividends from VMIN or VMAX will be taxed as ordinary income.

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Is Shorting UVXY, TVIX, or VXX the Perfect Trade?

Thursday, March 22nd, 2018 | Vance Harwood

The charts for long volatility Exchange Traded Products (ETP) like Barclays’s VXX, VelocityShares’ 2X leverage TVIX, and PowerShares’ 1.5X levered UVXY are astonishing.



I’m not aware of any other widely available securities that have declined like these.

Two questions come to mind:

  1. Why would anyone invest in these perennial losers?
  2. Why doesn’t everyone on the planet short these funds?

It turns out that there are reasonable reasons to buy these funds, and some people make money doing it. And a lot of people short these funds; it’s a crowded trade—to the point where it’s sometimes not possible to borrow the shares to short them.

It’s not easy money either way.

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The Cost of Contango—It’s Not the Daily Roll

Wednesday, April 12th, 2017 | Vance Harwood

It’s well known that long volatility Exchange Traded Products (ETPs) like VXX, UVXY, and TVIX often experience devastating losses during market quiet spells—even when the value of the VIX is staying relatively stable.   These heavy losses occur when the VIX futures that underlie these funds are in a price/time arrangement called contango. The chart below shows an example of VIX futures in a contango configuration.


The blue dots show the prices of various futures and the horizontal scale indicates the month of expiration.  The horizontal green line shows the current VIX price— also known as the “spot” price.  You can’t tell it from the chart, but in this example the leftmost future has 4 days until expiration.  At expiration, a VIX future’s value will be very close to the VIX spot price.

When futures are in contango the longer the future has until expiration the higher its price.

If you were to take a time lapse video of this chart over time with a stable VIX you would see the blue dots moving down the blue line, eventually intersecting with the green VIX line at expiration.

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