Strategies based on the contango of the futures curve are complemented by the Averaged Contango strategy class. Instead of using a fixed threshold value (for example, ‘short VXX if contango is greater than 0’), these strategies utilize various types of moving averages. Moving averages are used to determine the equilibrium historical value of the indicator. The current value is then compared with the historical one. Such strategies include the MacroInvestor VIX Futures strategy.
It was published in the MacroInvestor blog and is generally based on the usual premises of VIX strategies:
- In a calm market mode, futures are in a state of contango (near-term futures are cheaper than far-term ones). Instruments that mimic volatility by purchasing futures lose value in this state due to constant rolling from the near-term future to the far-term.
Additionally, the strategy reduces signal noise by averaging the ratios of F1 futures/VIX and F2/F1 futures.
To determine the threshold for deciding to go long or short on VXX, the long-term average value (from inception) is used. This removes the subjectivity of determining the threshold.
Strategy Rules:
Calculate R = average(F1/VIX, F2/F1) – 1. Short VXX if R < average historical R * -1, long VXX otherwise. Average historical R calculated from the inception.
Strategy Rules
Calculate the ratio = VIX/VIX3M. Short VXX on close if ratio < 1, stay out of the market if 1 < ratio < 1.05, long VXX if ratio > 1.05.
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 | 135 394% | 5 850% | 549% |
| Annualized return | 66% | 34% | 12.95% |
| Max DD | -57% | -92% | -34% |
| Sharpe ratio | 0.76 | 0.42 | 0.70 |
