Optimized version of the VIX vs VIX3M strategy (three-month volatility index). This version was published in the Vix & More and Six Figure Investing blogs. The main principle remains:
- In a calm state, the near-term index (VIX) is lower than the far-term index (VIX3M).
- In a calm state, short VXX and profit from the decay of futures.
- During periods of uncertainty, we go long on VXX. In such periods, instead of contango (near-term futures contract cheaper than the far-term), backwardation often occurs (near-term contract more expensive than the far-term), and VXX-like instruments start profiting from rolling over from the first future to the second.
The thresholds for entering short or long VXX are additionally optimized.
Strategy Rules:
Calculate ratio = VIX/VIX3M. Short VXX on close if ratio < 0.92, stay out of the market if 0.92 < ratio < 1.08, long VXX if ratio > 1.08.
Strategy Performance
Test period: 2010 – 15 Dec 2023. Costs (brokerage comissions, slippage and borrow cost) are not included.
| Averaged Strategy | Benchmark: Short VXX | Benchmark: SPY | |
| Full Return | 26 253% | 5 850% | 549% |
| Annualized return | 49% | 34% | 12.95% |
| Max DD | -61% | -92% | -34% |
| Sharpe ratio | 0.79 | 0.42 | 0.70 |
