VIX Trading Risks & Safer Wealth Building Strategies

Traders can be lured toward complex financial instruments thanks to the potential of otherworldly returns. But as the chart below shows, there's also the potential for massive losses.

Fortunately, by relying on the research and insight of the bona fide trading experts here at Money Morning, you won't need to chase money in some Wall Street-engineered scheme.

Just look at what happened to traders who got involved in the now-defunct VelocityShares Daily Inverse ETN (XIV), a particularly nasty piece of financial engineering created by Credit Suisse Group (NYSE: CS).

The XIV looked like a money-printing machine for years. It simply looked too good to be true.

The XIV taught its investors a hard lesson: Wall Street isn't your friend.

Between 2016 and 2018, the price for XIV rocketed from $20.02 to $134. That's a 570% gain for doing nothing but parking your money in Credit Suisse's creation.

But the good times didn't last...

You see, XIV was engineered to trade inversely to another derivative product, the CBOE Volatility Index (VIX). That meant as volatility fell, and VIX futures with it, the XIV would gain value.

That worked out for XIV ETN holders, as the VIX descended to its lowest levels in five years in 2017.

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Yet, if you look at this chart of VIX futures over the last five years, you'll see that while volatility was steadily dropping, it was hardly predictable.

And the period of declining volatility came to a sudden, violent end in February 2018...

The VIX spiked from 9.77, its second-lowest point in the last decade, to 37.32, a five-year high.

The sudden spike wiped out the XIV. It collapsed from $125 to end up completely worthless. Credit Suisse stopped trading on the note and closed the fund overnight.

One trader claimed to have lost his entire portfolio - $4 million - in the collapse of the XIV.

But it shouldn't have been that surprising...

Any investor could have looked at this chart of VIX futures to see that a spike wasn't just possible, it was likely to happen again. And investing in any financial product that would require a degree in calculus to understand isn't designed in your favor.

The XIV taught its investors a hard lesson: Wall Street isn't your friend.

But that doesn't mean you can't beat Wall Street at its own game, and make a fortune doing it...

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As we saw in this recent pullback, it can change direction in the blink of an eye.

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