Mid-Term investment methodology on Volatility with a proven edge over market - An institutional approach to trading with robust results -Why you should buy this course? e Includes a proven edge over market © Diversification from Short-Term strategy © More conservative / Less riskier e Proven and consistent methodology e Simple rules to apply * Basic options knowledge needed e Increase your trading knowledge in Volatility related assets e Live performance will be posted ¢ Continuous support to doubts / questionsMid-Term investment methodology on Volatility with a proven edge over market - An institutional approach to trading with robust results -Course Contents e Instruments to trade Volatility © Concepts on VIX® Futures pricing structure ¢ The trading approach e Backtesting / Strategy Optimization e Strategy RulesInstructor Background e Degree in Engineering and MBA * More than 10 years experience in Management Consulting ® Option trading for more than 6 years * Volatility trading in the past 3 years - Started with XIV and SVXY (buy ETNs) - Evolved on volatility trading with options ¢ Currently trading exclusively SPX, SPY and VXX strategies - Including hedging technics to protect capitalPrice evolution of a stock (TWTR)® The VIX® Index VxX Wh \ j \ } iN ee Ky \ ee AYeOe mM | 4 TT AT TA al a)Attractiveness of investing in Volatility V (+) When Volatility is High (VIX® in Zone 3), it is expected to come down after the market settles (and if it is predictable there should be opportunities to make money with an edge) (+) When Volatility is Low (VIX® in Zone 1), it is expected to continue in short term on these area until, unexpectedly Volatility pops (+) Long volatility tradeable instruments have long term depreciation due to its construction; and we can benefit from it! (-) Volatility is more unpredictable on the low side! When it pops, could be violent (including overnight, gapping in the next trading day! Volatility traders used to say: “Volatility takes the stairs down, but the elevator Up!”® Some drawbacks that you should be aware vax? Investing in Short Volatility is high risk and strategies must take into consideration this fact! Money management is crucial for long term appreciation! Short volatility strategies are a good complement of portfolio diversification! Diversification with several strategies (even within the same asset) will improve overall portoflio profitability and reduce risk® Course Contents vax? Instructor Background Volatility Trading vs Stock Trading Why investing in Volatility is so interesting? But ... Concepts on VIX® Futures pricing structure The trading approach Backtesting / Strategy Optimization Strategy RulesVIX® Index properties V * Computed with several options prices including several strikes to reflect 30 day forward expected broader market (SPX) volatility - When markets start to fall, investors start buying Put Options or VIX Call options to protect their portfolios and this increases volatility (VIX has an opposite relation with SPX) * Majority of time is below 12 (although in the past 2 years there is a decreasing tendency — given the continuous SPX successive years of appreciation) * Mean reverting: the most relevant property of VIX® (and volatility in general) - When going high, above 26, it is expected to revert and come to 11-12 range in short period of time - When going to 9-10 range it is expected to move higher * But VIX® is NOT tradable!vi: * Given that VIX® is not tradeable, there are ETNs (Exchange Trading Notes) that try to follow the Volatility Index (either on the Long side or the Short side of it) Instruments to trade Volatility * VIX® futures are the closest instruments and those ETNs are composed of them Instrument Long / Short Volatility Leverage Options VXX Long 1x Yes XIV Short 1x No SVXY Short dx Yes Lower Liquidity / High Options UVXY Long 2 Yes ote 12Price comparison between VIX® and VXX® = 1.3033 fon & Dw 0, Wise, We, Sane,VXX® ETN price evolution for past 2 years VXX°VIX® futures term structure V VIX Futures Term Structure Source: CBOE Delayed Quotes vixcentral.com 19-01 | Spot VIX® Dec Jan Feb Mar Ape May jun Jul Future Month * Buying High Valued Future (Jan 18) and Selling Lower priced Future (Dec 17) will erode Value of VXX® ETN * Futures in the settlement date will have the same value as the Spot VIX® Source: www.vixcentral.com 1s,V ® How VXX® works* * To mimic VIX index, VXX continuously buys Month n+1 “VX futures” and sells Month n “VX futures”. As per today VXX has a certain percentage of December Futures and remaining percentage of January futures * /VX futures are quoting the expected volatility of SPX on the settlement date of each contract * Barclays updates daily the components of VXX ETN. As long as time passes Jan 18 percentage will increase (and Dec 17 will increase) until the Dec settlement date (Dec 19) Index Components(as of 12/08/2017) CBOE vocruresens Buy ras cho vcruwepect? — Sell mast Source: SSP Dow Joes Indies LC aubec thera Note:Barclays website for VXX: http; fi Us/1 * The other ETNs works similarly; XIV/SVXY, since are short volatility inverts the futures that are bought and sold® Course Contents vax? e Instructor Background ¢ Volatility Trading vs Stock Trading e Why investing in Volatility is so interesting? But ... e Instruments to trade Volatility ¢ Backtesting / Strategy Optimization e Strategy Rules® VIX® futures term structure / Contango Vv VIX Futures Term Structure Source: CBOE Delayed Quotes vixcentral.com 16.360 15.780 16 15.380 — 14.860 —— 14.240 ——— ——= 13320 a 12320 a a 10.930 — e 10 —" rs 19.01 | Spot VIX 8 Dec Jan Feb Mar Apr May Jun Jul Future Month * Majority of time, the VIX® futures structure is in Contango (~85% of the time): ascending futures pricing * This impacts negatively VXX® ETN price. That’s why it has negative drag as seen before when comparing with VIX® Source: www.vixcentral.com 18VIX® futures term structure / Backwardation VIX Futures Historical Prices vixcentral.com 25 24725 24 \ \ ‘ba.125 ® 22.825 2 \ 22.525 2 221450 ~ O° 22.400 ~ 22.875 |_o9-075-op075 7 ———__.— 2 ° 2 60 90 120 150 180 240 240 Days to Expiration * In turbulent times, when volatility increases sharply, the VIX® futures structure inverts and defined as in Backwardation + This fact inverses the impact of VXX® ETN price and it increases as it now is buying lower priced future (month n+1) and selling the higher priced future (month n) + Usually the Backwardation status will only last few days or weeks (when markets surpass accritical moment and volatility start to decrease) Source: www.vixcentral.comKey concepts on VIX® futures pricing structure VIX Futures Term Structure Source: CBOE Delayed Quotes vixcentral.com 16.360 15.780 15.380 = 14.860 a 14.240 Volatility 12 19.930 10 Dec Jan Feb Mar Apr May Jun Jul Future Month Spot VIX®% Contango and Roll Yield are a headwind for VXX ° VXX® price * Inthe given example, %Contango = 12,7%, which means, if all other variables do not change (ex, volatility), VXX® will decrease daily about 0,5% of its value, only accounting for Contango * Since futures are also loosing value (given contango state) and settle at Spot VIX® it shouls also be added to the equation the Roll Yield * Both affects negatively the VXX® price in the long run Takeaways: * DONOT take Long positions in VXX® (very difficult to profit on a strategy with long positions) * Only take short positions in VXX® when % Contango is >5% (or if market crosses from Backwadation to Contango — which means volatility is decreasing and market is going back to normal state and VXX has this headwind® Course Contents vax? e Instructor Background ¢ Volatility Trading vs Stock Trading e Why investing in Volatility is so interesting? But ... e Instruments to trade Volatility © Concepts on VIX® Futures pricing structure sf Tewadrgspproat ¢ Backtesting / Strategy Optimization e Strategy RulesThe trading approach V Consistency and capital appreciation will only be achieved if both concepts (below) would be incorporated in your trading | also see my trading as a business and | have clear goals on it: - Ex, I target for a 3%-5% monthly return (>50% annually) - I know exactly what is my Net Liquidation target for the end of each month (1) Statistical Edge Which trade, in the long run (ex, 2-3 years), produces consistently a profit ? (2) Trade (and Money) Management For each trade | enter, | know exactly what is my profitability goal and maximum loss (and | stick to it) | also do not enter similar/correlated trades that accounts for more than 5% of my total portfolio Given the amount of money at risk, how can | hedge positions to protect from a sudden event ?(1) Statistical Edge — The basis of the VXX® Trade VXX 60 Day Price Variation (%) Histogram* Analysis from 1Nov13 until 310ut17 (data source: Yahoo.com). Price comparison with rolling days distant 60 days® (2) Trade (and Money) Management V AvgWinner 50 25 25 Avg Looser -50 -100 Win Rate Expectancy * Trade Management / Cut losses are key to consistency in the long term! * Fora Win rate of about 65%, a loss equal to the expected win value will drive positive outcome in the long term; allowing losses above this level will produce low to negative statistical expectancy * Money management rules that | apply - Ido not have more than 5% of my total account value invested in a unique trade - Lalso add VIX Call Spreads to hedge against a sudden volatility increase (later discussed) ~ recall the 50% increase in VXX price at 8,5% of the time 25® Course Contents vax? Instructor Background Volatility Trading vs Stock Trading Why investing in Volatility is so interesting? But ... Instruments to trade Volatility Concepts on VIX® Futures pricing structure The trading approach Strategy RulesHow to profit from VXX® price decay ? * Ona mid-term strategy, more conservative, than the “Weekly Short Verticals”, another good option | found so far (in terms of consistency, profitability and trade management) is buying Puts Using a sistematic approach, with clear rules, to avoid emotions Risk is controled (even in the event of a big volatility spike) ~ Maximum loss is capped Ona specific day, a new position is entered, at a predifined Delta (to profit from VXX price decay) + Shorting directly the ETN is more margin consuming and risky (in the event of big spike in volatility), also the cost to borrow charged by the brokerBut what strike and timeframe produce the best results when buying VXX® Puts ? vi: The rules optimization came from a professional backtesting software (CMLViz*) designed for option trading strategies development | have tested it for several combinations of strikes and different time frames for this ETN “website of this service is http://tm.cmlviz.com/ (Options Backtester Service) 28Tests for strike optimization and DTE for VXX® Put buying (I) ° TEST 1 uy 70 Delta Put Bspiration: 30 Days Hiked $002 “etal Retum: $4090 Byears — |% Return: (6a Commissions: $119 Data % Wins: 66.7% Wins: 26 Losses: 12 Gain: Loss $0092 $2602 fact $750 otal Return: $4592 Syears — |ssretum: (60596) Data Commissions: $191 SeWines 62.54% Wins: 40 Losses: 24 $3707 $4175 Buy 50 Delta Put pation: 30 02 epration: 30 Days sisced: = $94 | | nicked: © $200 Total Return: $3510 | | Total Ratu: $2612 se Retum: 9BH—) | | Return; IOREREA! Commissions: $111 | | Commissions: $108 ae wines 64.1% | | Se Wine: 5996 ‘wins: 25 Losses: 14| | wins: 22 Losses: 16 Gain; Loses Gain: Loss sms $2303 | |$as16 $2005 Buy 00 Delta Put Buy 50 Delta Put i ads $811 Risked: $893 resirewn: $0913 | |r Retun: $2339 se Retum: SG | se Return: BGR commascse: $108 | |commissone: $101 seine: 986M | ne: 51.6% wes 85. tose: 28 | |e: 93 ont: a8 Sios_—“Sbsa_| Sette Sze : VXX Put Buying (30 DTE) test results: Buy 40 Delta Put siked: «$189 etal Return: $2101 Se Retum: SSA Commissions: $105, % Wine: 48.7% ‘wins: 19 Losses: 20 ain Loss: Ssua1 $1690 Buy 40 Delta Put $974 ee Bished Total Return: $1415 core: AS Commissions: $191 45.2% 6 Wins Wins: 29 Losses 95 $4907 ‘$3502 “Analysis made with no Money management criteria and held until expiration 9% Wins wins: 25 $3024 Buy 30 Delta Put spiation: 30 Days nike: $200 Total Retum: $1451 se Return: (226) Commissions: $102 GeWins: 46.29% wing: 18 Losces: 21 Gain: Loss $2737 $1286 Buy 30 Delta Put Commissions: $192 29.1% Losses: 39 “$2704 29Tests for strike optimization and DTE for VXX® Put VXX ° buying (II) * TEST 2*: VXX Put Buying (60 DTE) test results: ty 70 Delta Put expiration: 99 Days slaked: $959 ‘oral Return; $4859 60 Delta Put Bxpiration: 60 Days aked: $500 Total Retum: $4345 Buy 50 Delta Put | | Buy 40 Delta Put | { Buy 30 Delta Put sised: $409 | | ished: = $276 | |iskeds © $164 Total Retum: $3720 | | Total Return: $2804 | | Total Retum: $2021 BZ years |sRetumn: SOR fre Retum: — GAAZML | [oe Return: §— SHRM | | Return; GLORBAK fo Return: LAREN Data commissions: $56 | [commissions $56 | commissions: $56 | |commissions: $56 || commissions: $56 Wins: 80% SeWins: 75% Se Wins: 75%) Wins: 75% | |S Wins: 75% Wins: 15 Losses: S| | Wins: 25 Losses: S| | Wins: 15 Losses: 5 Wins: 16 Losses: 4 Wins: 15 Losses: 5 Gain: Loss $5095 $750 Gain Lose Gain Lose! Gain: Loss $4721 $501 $3304 $500 $2317 $296 Expiration: 60 Days jration: 60 Days | | Expiration: 60 Days | | Expiration: Expiration: Bikes: $518 | |iskod: © $08 | |aiskas: © $339 (| | Rishos: Bisa S years |TalRatum: sezer | |toutraturn: $3519 | |rotal tun: $4570 | |totalRatum: $2427 | (Total Ratum: $2309 So Roturn: — GBOGHS) > Roun: © BSAWK! | % Return: BSOH) |e Roturn: § HABBWE! | 6 Rowen: © AZAD Commissions: $95 | | Commissions: $95 | | Commissions: $95 | | Commissions: $95 | | Commissions: $95 SeWins: 77.4% | |e Wins: 71.0% | om wins: 72.00% | | ae Wins: 68.89 | ee Wins: 56.396 Data wins: 24 Losses: 7 | | wins: 29 Losses: 9 | |wins: 29 Losses: 9 | |wins: 22 Losses: 10| | wins: 18 Losses: 14 Gain Loss Gain Loss Gain Lose Gain Loss Gain: Lose sacsa $2413 | |$7aso $1070 | | $o140 $1570 | | $4762 $1335 | |$a340 $1037 | *Analysis made with no Money management criteria and held until expiration 30Tests for strike optimization and DTE for VXX® Put VXX ° buying (III) * TEST 3*: VXX Put Buying (90 DTE) test results: © ra ae waar 3 years Data 5 years Data si192 Total Return: $4564 Return: RR Commissions: $36 sewing: 92.99% Wing: 12 Losses: 1 Gein: $5251 Seas Total Retwn: $4071, SeRetum: (IO commissions: $36 %eWvings 84.60% wins: 11. Losses: 2 Gain: Lass: Sa50s $432 Buy 50 Delta Put Richa: $400 Total Ratu: $2405 So Retum: 5356) commissions: $96 Se wines — 76.99% Wins: 10 Losses: 2 Gain: Loss Ssuss $413 Buy 40 Delta Put Biskes: $276 Total Retuin: $2640 Return: (BS896) commissions: $36 Wing: 69.2% Wins: 9 Losses: 4 Gain: Loss sus $533 Buy 30 Delta Put Sicko: $352 Total Retum: $1703 So Retum: (506) ‘commissions: $35 Se wins: 69.29% Wins: 9 tosses 4 Gain: Lows $2375 $502 ry 70 Delta Put Expitation: 90 Days ike sua otal Return: $5623, commissions: $62 Wins: 17 Losses: 4 Sria‘Sioss lskeds oral eum: $4652 ‘commissions: $62 Wins: 25. Losses: 6 Buy 50 Delta Put Risked: $805, Total Reuum: $3593, Return: 6706) commissions: $62 Wing: 23 Losses: ait be ssa77-$1nn4 ‘Buy 40 Delta Put Expiration: 90 Days pikes $550 Total Return: $2511 se Return: (51396) ‘commissions: $62 Wing: 21. Losses: 10 Gain) Lees $4579 $1763 *Analysis made with no Money management criteria and held until expiration Buy 30 Delta Put Expiration: 90 lsked $3 oral Ratu: $2053 se mecurn: ASB) commissions: $62 Wing: 22. Losses: 20 Goins Loe $3023 $1570 31® VXX® Put Buying Backtest Resume V 3Years Long Put >60%Wins 3045, 75 90 70 4090 3537 3862 4564 60 3510 2801 3513 4071 Delta 50 3204 3485 40 2628 2640 30 2021 1952 1783 5Years Long Put DTE >60%Wins 30 45 60 75 90 4532 6241 «51105623 5519 4109 4652 4570 3494-3593 3427 Delta 8ssssa 32® Course Contents vax? e Instructor Background ¢ Volatility Trading vs Stock Trading e Why investing in Volatility is so interesting? But ... e Instruments to trade Volatility © Concepts on VIX® Futures pricing structure ¢ The trading approach ¢ Backtesting / Strategy Optimization 33® Trade Rules V 1. Check if Contango level is above 2% (if below delay entering a trade) 2. Check VXX option chain and see if there is availability of 58-62 DTE 3. Open the desired option chain and look for the 70 delta VXX Put and buy one contract + Ifonthe day (or the day before) VXX has increased value consider to open 2 contracts * Price should be betweem 9 and 11 (total investment per contract will be around 1.000USD) + If during the trade there is a new volatility spike, you could open a new order benefiting from a lower Put price, if you have higher risk tolerance 4. Trade Management + Close trade if loss reach 50% of th investment value (~500€ per contract) + Close it one day before it expires to avoid being assigned (either with a loss or profit * Close positions before any reverse stock-split on VXX + [suggest close it for profit if you enter a new order for a new 60 day cycle and maintain risk level (unless you can support more than one open order — do not invest more than 50% of your account capital) 34Trade example (1) — Analysis of 70 Delta VXX Put V 1. Max Loss is the price paid for the Put ($885); although if loss reaches 50% of that value, close the trade 2. Unlimited max profit — Theta negative / Delta negative position!