XIV and VXX Trading..Part 1...07.06.16.

Many traders maintain a fascination for the trading possibilities offered by XIV and VXX, 2 ETN derivatives of the VIX volatility index.  VXX often has 10-20% more daily volume than SPY,  has a rich option chain with narrow spreads and it trades good volume in the after hours markets. There are a few caveats trading VXX...the biggest is that it is intrinsically decaying and in a long term flat market it would eventually resolve to zero. VXX is not a buy and hold candidate. VXX is a hit and run trade...holding longer than a week is akin to sitting on a keg or dynamite....BUT, and this is a big BUT...the return can be spectacular if you're on the right side of the trade.  XIV is a horse of a different color, offers no options, has daily volume significantly below but does trade afterhours.
As with VXX daily volatility in XIV can range to 10% or more and the profits can be stunning.
I prefer to trade this dynamic duo as a delta neutral pair but I'm an old man with a weak heart so please forgive my lazy man approach.
This week, for more aggressive traders we will explore several algorithmic constructs that may help mitigate the drawdowns that poor directional choices in these ETNS will inevitably produce.
For today's research here are the MVP PCL (previous close to low)/volatility studies of VXX and XIV.  There are 2 versions of MVP...one long that trades positive beta issues like XIV and one short that trades inverse issues with negative beta like VXX. The yellow arrows highlight areas where price fell significantly but the model kept you in cash and out of danger.
Tomorrow we'll look at these performance metrics in more detail.