Another contango-class strategy for assessing the market state and profiting from the decay of long VIX futures instruments. In this strategy, we also use the shape of the futures curve as a signal. However, instead of comparing the market’s expected VIX value for a specific calendar date (futures), we use a combination of futures prices at a fixed distance in days from the current date.
This approach has certain advantages. If, for example, we take the difference between VIX and the front month futures (F1) as a signal, the distance to expiration can vary greatly – from 1 day to 30. And this distance changes every day. In contrast, comparing VIX and futures prices, calculated for a fixed time frame, eliminates this disadvantage and seems quite logical.
Therefore, to assess the signal, we will use Constant Maturity Price (CM) – that is, interpolation of prices by date between F1 and F2. CM is calculated using the following formulas:
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))
Strategy Rules
Short VXX on close if VIX index is below 30 days constant maturity futures (interpolated F1 and F2 or F2 and F3). No positions otherwise. (we still consider that long VXX-like instruments is a bad idea in most situations).
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 | 11 555% | 5 850% | 549% |
| Annualized return | 40.5% | 34% | 12.95% |
| Max DD | -54% | -92% | -34% |
| Sharpe ratio | 0.63 | 0.42 | 0.70 |
