Another strategy based on the properties of the futures curve.
Here, we analyze the difference between the VIX and the first (nearest) futures contract on it (F1). This ratio, known as the basis, serves as an indicator of normal stock market behavior.
If the market is calm, the value of the VIX index is lower than the first futures contract (the basis is positive). In the case of a downturn or a stressed market, the situation reverses.
Moreover, as the expiration time approaches, the price of the futures and the index converge, and if the VIX remains steady, the price of the first futures contract gradually decreases.
Since a calm market presents an opportunity to profit from VIX derivative instruments due to the shape of the futures curve (contango), we can formulate a strategy using such instruments and the VIX/F1 indicator.
Strategy rules
Short VXX on close if the VIX index is below the first month VIX futures contract (F1). No positions 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 | 12 930% | 5 850% | 549% |
| Annualized return | 41.7% | 34% | 12.95% |
| Max DD | -64% | -92% | -34% |
| Sharpe ratio | 0.69 | 0.42 | 0.70 |
