In this strategy, the volatility of volatility is used to determine the state of the market.
Typically, when the stock market falls, the VIX sharply increases. And the rate of its change is much greater than in a calm state. That is, when the market is rising, the VIX usually gradually decreases or remains steady. But if the market falls, the VIX increases sharply and abruptly.
The speed of this growth can be assessed through the volatility of the VIX itself over a short period. Another method of assessment can be the VVIX index – this is the implied volatility of volatility.
With such methods of assessment, we get a fast indicator that can be used both for shorting VXX (in a calm state) and for going long (in a state of panic).
As a threshold, we will use 20% (which is ~102% annualized).
Strategy rules
Calculate historical volatility (HV) of VIX daily returns over 10days. If HV < 0.2 short VXX. Otherwise long VXX.
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 | 81 159% | 5 850% | 549% |
| Annualized return | 62% | 34% | 12.95% |
| Max DD | -69% | -92% | -34% |
| Sharpe ratio | 0.7 | 0.42 | 0.70 |