This strategy was published in the Evolution Capital workpaper. It analyzes both the shape of the VIX futures curve at the moment and the dynamics of the F1 and F2 futures spread (yield from rolling).
When using ETFs and ETPs on the VIX, the state of the futures curve is extremely important, as these products hold a combination of futures and lose money if the market is in a state of contango (which happens ~80% of the time). However, during stock market downturns, volatility spikes sharply. The task of such strategies is:
- Reliably identify the state of the futures curve
- React quickly if the market shifts from a calm to a panicked state.
Analyzing the yield curve helps address both issues. The most rapid indicator in this case would be the ratio of the VIX to the front-month future. However, for more reliable identification of regimes, additional ratios have been added.
We analyzed a slightly modified version of the strategy. Initially, it involves both long and short positions in volatility products, but usually, the losses from rolling are so great that long volatility is unattractive. And although the long-short version reduces the correlation with the index to almost zero, we used only short volatility here. In our view, long volatility should be implemented using other instruments.
Strategy rules
IF VIX less then front VIX Futures (F1) and F1 less then second month futures (F2) check roll yeld. If roll yeld (RY) is greater then its 20-day simple moving average (SMA) – short VXX. No position otherwise.
Strategy Performance
Test period: 2010 – 15 Dec 2023. Costs (brokerage commissions, slippage and borrow cost) are not included.
| Averaged Strategy | Benchmark: Short VXX | Benchmark: SPY | |
| Full Return | 14 252% | 5 850% | 549% |
| Annualized return | 43% | 34% | 12.95% |
| Max DD | -51% | -92% | -34% |
| Sharpe ratio | 1.02 | 0.42 | 0.70 |
