This strategy utilizes the dynamics of the VIX futures yield curve to determine the market regime. The strategy was published by Godot Finance in this workpaper.
As is typical for such strategies – in periods of a calm market short VXX, and during panic periods, long VXX. Essentially, we profit from the rolling of VIX futures. The criterion for the market state is contango.
To determine contango strategy, compare the current value of the VIX index and Futures Constant Maturity (45 days). Constant Maturity is calculated as an interpolation of the prices of the nearest futures in the following way:
If there are more than 45 days until the expiration date of the second VIX futures (F2) (meaning the required CM date is between the first and second futures):
l = F2 expiration date – current date
m = constant maturity date (we assume 30)
s = F1 expiration date – current date
Constant Maturity (CM) = F1price * (l – m) / (l – s) + F2price * (1 – (l – m) / (l – s))
If there are less than 45 days until the expiration of F2 (meaning the CM date is between the second and third futures), the formula is similar, but we use futures F2 and F3 instead of F1 and F2.
To compare VIX and CM, use the IVTS coefficient = VIX/CM. If it is less than one – the market is in a calm state.
However, the indicator obtained is quite noisy – with a lot of crossings through 0. To reduce the noise, we calculate IVTSmed as the median value of the moving five points of IVTS. To decide on opening a position, we analyze the obtained value.
Strategy Rules
Calculate IVTS = VIX / 45days Constant Maturity. Then calculate IVTS 5-day median. Short VXX if median < 0.91, long VXX if median > 1.1. 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 | 12 387% | 5 850% | 549% |
| Annualized return | 41% | 34% | 12.95% |
| Max DD | -63% | -92% | -34% |
| Sharpe ratio | 0.86 | 0.42 | 0.70 |
