This version of the VRP strategy was proposed by Trading the Odds, which has now ceased to exist.
The general logic of VRP strategies – to estimate the size of the IV premium over historical volatility – is preserved here. Then, depending on the dynamics of the premium (whether it is overstated relative to the average or not), a decision is made about entering positions. However, there are some specifics.
- The 30-day constant-maturity (CM) of VIX futures is used as the IV estimate.
- VRP is calculated as the difference between the 30d CM and historical volatility. In the original strategy, historical volatility was taken over 2 days. Such an estimate is completely unacceptable, as the error, for example, at a volatility level of 20%, would be 14%. For the test, the volatility calculation was taken over 4 days. This is also not perfect, but for the test, it was decided not to deviate far from the original parameters. However, this strategy will not be included in the model portfolio.
- The obtained VRP value is smoothed with a 5-day exponential moving average. The use of an exponential MA increases the significance of the latest (most recent) points in the series and, in our opinion, is justified.
- The obtained value of the moving average is compared with a threshold. A threshold value of 1% is used.
Strategy Rules
Calculate VRP – 30-day constant maturity price of VIX futures – (4-day historical volatility of SPY * 100). Then calculate a 5-day exponential moving average of VRP. Short VXX if exp_MA > 1, long VXX 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 | 25 043% | 5 850% | 549% |
| Annualized return | 49% | 34% | 12.95% |
| Max DD | -80% | -92% | -34% |
| Sharpe ratio | 0.62 | 0.42 | 0.70 |
