Today, we’d like to talk about VelocityShares Daily Inverse VIX Short Term ETNs ( XIV). Currently one of the most popular volatility vehicles to trade on the market, XIV ETNs are being traded by both active traders and investors globally.

The direct inverse of VXX, the value of XIV is correlated with the opposite of the daily S&P 500 VIX Short-Term futures Index. The Chicago Board Options Exchange Market Volatility Index (VIX) is an indicator of implied short-term volatility in the options contracts traded on the S&P 500. While VIX is represented as a percentage value instead of a monetary one, the volatility of the options contracts themselves reflects their underlying value against the likelihood of expiration. Just like VXX, XIV enables traders to indirectly invest in the VIX.

If you’re not trading options or futures actively, XIV opens a new door into entering a short position on market volatility. Again, like the VXX ETNs, XIV is not directly linked to the performance of the VIX, and cannot be traded accordingly. A number of traders use strategies to short VXX directly. If you are unable to short VXX, simply having a long position in XIV is an excellent alternative. Directly shorting VXX leaves an investor vulnerable in situations where market volatility drastically rises. XIV offers traders the inverse position to the VIX and can produce gains in both lateral and downward movement of the VIX. While not identical, VXX and XIV track

fairly closely day-by-day on an inverse basis.

On April 25th, 2012, after Apple (AAPL ) announced very positive earnings, the S&P 500 opened 0.7% higher and the NASDAQ over 2% higher, but XIV opened nearly a full 5% higher than the previous close. When youre correct in predicting overall market direction, the gains are often substantially greater being in a long position in XIV than a long position in an index. The opposite of this holds true as well if the market moves down, XIV will often drop more than the indexes.

When you believe the market will rise, take a long position in XIV.

With the diversity of volatility vehicles available on the market, traders can take full advantage of the opportunities trading volatility has to offer. Understanding the different characteristics of these ETNs is critical in advancing your returns when trading volatility. Get in on the ground floor of this highly profitable investment vehicle, and gain a unique

edge to your trading strategy.

One of the ways many professional traders trade VXX and XIV is in a pair, hedging them with a market index ETF such as SPDR S&P 500 (SPY ) and ProShares

Short S&P500 (SH). Tomorrow, we’ll take an in-depth view at what this strategy looks like in the next part

of our series.

Larry Connors is CEO of Connors Research

Cesar Alvarez is Director of Research of Connors Research