XIV Fund Summary The investment seeks to replicate, net of expenses, the inverse of the daily performance of the S&P 500 VIX Short-Term Futures index. The index was designed to provide investors with exposure to one or more maturities of futures contracts on the VIX, which reflects implied volatility of the S&P 500 Index at various points along the volatility forward curve. The calculation of the VIX is based on prices of put and call options on the S&P 500 Index. The ETNs are linked to the daily inverse return of the index and do not represent an investment in the inverse of the VIX. So if the bundle of VIX futures went down 2%, the HIX should be (1/.98) -1 = +2.04% right? So if the bundle of VIX futures triples, the HIX should only lose 66% of its value? Which means convexity is on our side if we Long XIV and Long VIX futures, while expenses are funding costs and ETF fees. Seems like the trade off is a great deal? Maybe I'll do long 1.3x XIV and 1x VIX Futures, so I'm still winning a little during the calm as well. Or am I missing something? Thanks all, Jeffrey

There is no convexity there. XIV is an inverse of an index, check the index definition to get a full understanding

Thanks sle, Maybe convexity was a wrong word choice, but what I thinking was the VIX futures can triple in value while losses from XIV is bounded by 0. So in extreme scenarios this should be profitable? Meanwhile in "normal" days the two seem to offset each other quite closely.

XIV is short the first and 2nd contract of VIX futures. It can go to 0 if those 2 contracts move up a lot so there is no free lunch. The good thing is it's like a stop loss in case of disaster, bad thing is when this happens everyone is probably headed for exits so it's the ETF is buying selling futures at shitty prices

You pay fees on both legs. Also, you have negative convexity on XIV as for all the inverse ETFs (in effect you pay for what you think is positive convexity). For instance have a look at: http://www.q-group.org/wp-content/uploads/2014/01/Madhavan-LeverageETF.pdf

See pages 6-7 of the prospectus. The ETN indicative value given one days VIX index return of r is the following: N1 = N0 * (1 + A + L * r) * (1 - F) Where N1 is the new indicative value, N0 is the previous indicative value, A is the daily accrual (defined in paper), L is leverage (-1 in XIV case), and F is the daily expense ratio. If the VIX triples then the return is: r = 3 * V0 / V0 - 1 = 2 And applying the formula above: N1 = N0 * (1 + A - 1 * 2) * (1 - F) = N0 * (1 + A) * (1 - F) - 2 * N0 * (1 - F) Now assume A and F are approximately 0, then: N1 = N0 - 2 * N0 = - N0 For a return of: -N0 / N0 - 1 = -2

I use nursery / kindergarten / grade 1 mathematics to trade. And you guys use phd mathematics to trade. Now let's see what is bottom line. are you making money using phd mathematics?

Yes, but it's a mix of math and tech to truly make it work. Also, most of the math behind this stuff isn't too complex. Maybe a bit more difficult for the derivatives people.

Thanks quant1, your formulas led me to the below findings. Originally i thought XIV return is: N1 = N0 / (1+r) which gives the below incorrect payouts (in all cases total value always > initial. Using XIV (approximate) return: N1 = N0 - (r * N0) I get below instead. so when VIX is flat after a period of up and downs, XIV appears to converge to zero. But another thought came up - your provided formula implies XIV will go to zero whenever VIX doubles? That can't be correct because we've all seen VIX doubled many times?