Len Yates – President and Founder OptionVue Systems International

1. Len Yates – President and Founder OptionVue Systems International Len Yates is a professional programmer with over thirty years of experience in options software development. Since founding OptionVue he has earned worldwide recognition for his groundbreaking work in options analysis software, education and data services. How to Trade Volatility ETFs For Big Returns: Trading the VXX/XIV

2. Disclaimer Educational materials are provided by OptionVue Systems International (OSI) for informational and educational purposes only and are not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees. Options involve risk and are not suitable for all investors. In addition, electronic trading poses unique risk to investors. System response and access times may vary due to market conditions, system performance and other factors. You should thoroughly research and understand any security before investing in it. OptionVue provides neither investment nor tax advice.

3. Actual Trading Results $42,000  $185,000 Dec 23, 2013 Feb 13, 2012

4. Actual Trading Results Up 238%, 3.38x

5. Volatility Products VXX (ETN) SVXY (ETF)

6. Volatility Products VXX (ETN) SVXY (ETF) Inverse: XIV (ETN) VIXY (ETF)

7. Volatility Products VXX (ETN) +2.3% SVXY (ETF) +2.3% Inverse: XIV (ETN) VIXY (ETF) -2.3% -2.3%

8. Volatility How is it represented? How is it measured?

9. Volatility How is it represented? How is it measured? The $VIX

10. Chart of $VIX

11. Volatility Products VIX Futures VIX

12. VXX Volatility Products VIX Futures VIX

14. What is the VXX? ETN (exchange traded note) representing a standard 30-day VIX futures price. VX is the symbol for the VIX futures, and the VXX is invested entirely in VX futures. Contract Price Days Remaining VX Jun 15.90 14 VX July 16.90 43 VX Aug 18.15 72 VX Sep 19.40 104

15. What is the VXX? VXX holds proportionate amounts of the 1st and 2nd VX futures contracts. Example: Contract Price Days Remaining Holding VX Jun 15.90 14 50% VX July 16.90 46 50% VX Aug 18.15 72 VX Sep 19.40 104

16. Next Day VXX must shift some of its holdings from the 1st VX futures contract into the 2nd. Example: Contract Price Days Remaining Holding VX Jun 15.90 13 47% VX July 16.90 45 53% VX Aug 18.15 71 VX Sep 19.40 103

19. Trading System Proprietary indicator: $VXDIF = Price of 2nd VX future - Price of nearby FX future We use a 15 day moving average of the $VXDIF

24. Results The result is an amazing 54.4 times your money in the 3.5 year period beginning Jan 30, 2009. (XIV is an ETN that is a mirror image of VXX)

25. The LVI Lentz Volatility Indicator (LVI) is an indicator that shows whether volatility, as measured by actual price movements in the $SPX index, is increasing or decreasing. Volatility increasing Volatility decreasing

26. Results Again beginning at Jan 30, 2009, the trades signaled by the refined approach were: (A remarkable 80 times your money in 3.5 years)

27. Actual Results Now up 238%! Study period ending date OptionVue Clients began trading

28. Roll Yield Each day the VXX fund must sell some of its holdings in the nearby futures contract and buy more of the 2nd VX futures contract. This is called “rolling”. If the two contracts are at different prices, the fund will see either a gain or a loss as they roll. This gain or loss is called the Roll Yield. Contract Price Days Remaining Holding VX Jun 15.90 13 47% VX July 16.90 45 53% VX Aug 18.15 71 VX Sep 19.40 103

29. Term Structure The term structure of a set of futures contracts refers to the price relationship of the various contracts as you go out into longer duration contracts. Normal term structure Contract Price Days Remaining Holding VX Jun 15.90 13 47% VX July 16.90 45 53% VX Aug 18.15 71 VX Sep 19.40 103

30. Term Structure Example of a backward term structure. Backward term structure Contract Price Days Remaining Holding VX Jun 41.60 13 47% VX July 34.90 45 53% VX Aug 29.35 71 VX Sep 27.44 103

31. Roll Yield When a normal term structure exists, the roll yield is negative as the fund must buy futures at a higher price (the 2nd contracts) than the ones it is selling (the nearby). Normal term structure Contract Price Days Remaining Holding VX Jun 15.90 (selling) 13 47% VX July 16.90 (buying) 45 53% VX Aug 18.15 71 VX Sep 19.40 103

32. Roll Yield When a backward term structure exists, the roll yield is positive as the fund may sell futures at a higher price (the nearby contracts) than the ones it is buying (the 2nd month contracts). Backward term structure Contract Price Days Remaining Holding VX Jun 41.60 (selling) 13 47% VX July 34.90 (buying) 45 53% VX Aug 29.35 71 VX Sep 27.44 103

33. Effect of Roll Yield Normal Term Structure  Negative Roll Yield, depressing the VXX price Backward Term Structure  PositiveRoll Yield, enhancing the VXX price

34. Effect of Volatility Changes Increasing Volatility  VXX Rises Decreasing Volatility  VXX Falls

35. The Two Forces Affecting VXX Price Changing Volatility Levels (Immediate, impactful) 2. Roll Yield (Subtle, slow, steady)

37. Warning: VXX and XIV are volatile Proceed at your own risk! Example, after our clients bought in at around 10.7, the XIV dipped down to 8.1 just 5 weeks later. Still, the use of stops is not recommended.

38. Warning: The Daily Adjustment Factor When volatility jumps up, and then goes back down, this hurts the inverse products such as the XIV. All volatility products move on a daily percentage basis. Let’s say volatility goes up 3.0% one day, and the next day returns to its previous level. That would be a 2.91% drop. VXX VX Futures XIV +3% +3% -2.91% -2.91% -3% +2.91%

39. How aggressive do you want to be? • Segregate some funds for this purpose. • Decide how aggressive you want to be in this account, and abide by your decision. • Will you ever utilize all your cash? (Go all in?) • Will you ever go beyond that and use margin? • Will you ever use options? (The VXX has options)

40. Short the VXX or long the XIV? Three drawbacks to shorting the VXX: You must manage the position, selling more shares from time to time. Right after selling more shares, the market might move against you, triggering a margin call. The ultimate risk with any short position: You could lose more capital than just what is in your account.

41. There is a 3rd way (During normal times in the markets) Long the XIV. Short the VXX. ?

42. There is a 3rd way (During normal times in the markets) Long the XIV. Short the VXX. Buy deep ITM VXX puts

43. There is a 3rd way (During normal times in the markets) Long the XIV. Short the VXX. Buy deep ITM VXX puts (much higher leverage) (Utilizing just 1/3 of your cash, you can get the same delta as being all-in with the XIV)

44. What could go wrong? If it is normal times and you are short the VXX or long the XIV, a sudden catastrophe would cause the market to move against your position, and you may need to act quickly to close your position, possibly at a loss.

45. Volatility Products VXX = an iPath ETN from Barclays XIV = VelocityShares ETN from Credit Suisse VIXY = ProShares ETF that moves like the VXX SVXY = ProShares ETF that moves like the XIV

46. Volatility Products VXX = an iPath ETN from Barclays (simple tax accounting) XIV = VelocityShares ETN from Credit Suisse (simple tax accounting) VIXY = ProShares ETF that moves like the VXX (complicated tax accounting) SVXY = ProShares ETF that moves like the XIV (complicated tax accounting

47. What tradable instrument is so abstract it is 8 steps removed from reality?

48. 8 Steps Removed from reality Company Shares (rep. company ownership) Index (aggregate many stock prices) Options on index VIX (aggregate IV’s of many S&P 500 index options) VIX Futures Volty Products (use VIX futures) Options on volty products

49. Volatility Products VXX and XIV are ETNs ETN = Exchange Traded Note Promissory Note. They promise to pay a return to the holder that simulates the returns from actually trading the VX futures. In fact, they do not need to trade the VX futures and probably don’t !

50. Volatility Cone Volatility  Time 