Below I’ve shown the November/December and full year results for all 24 strategies we’ve blogged about previously, trading the short-term VIX ETPs XIV and VXX. The majority struggled in the final months of the year, with XIV, ZIV and other short volatility vehicles (the primary driver of returns for most of these strategies) performing poorly. Read about test assumptions or get help following these strategies.

*See the end of this post for links to all of the strategies included in this report.*

XIV and VXX are of course not the only show in town. Below I’ve rerun the same tests, this time applying each strategy to the less popular (or is it “underutilized”?) mid-term VIX ETPs ZIV and VXZ *(click to zoom).*

Note that when any of these strategies signal new trades, we include an alert on the daily report sent to subscribers. This is completely unrelated to our own strategy; it just serves to add a little color to our daily report and allows subscribers to see what other quantitative strategies are saying about the market.

Good Trading,

*Volatility Made Simple*

*Stategies included in this report: First vs Second Month Futures, VIX vs Front Month Futures, VIX vs 1-Month Constant Maturity, VIX vs VXV Indices, V&M’s VIX:VXV Ratio, TM’s RSI(2), DFTB’s StDev Strategy, DFTB’s Spread Strategy, DDN’s Momentum Rotation, DDN’s VRP Strategy, 10/100-Day MA Crossovers, TWP’s Quadratic Fit, NAS’s VIX Futures Momentum, S&P 500 50/200-Day Crossovers, Brute Force Optimized VRP, LI’s Bollinger Band Strategy, LI’s SMA Crossovers, Evolution Capital Strategy, TTO’s VRP Strategy, MS’s Mean-Reversion, Macro Investor Strategy, QT’s VXV:VXMT Strategy, TTO’s Optimized VRP, Godot’s Mojito 3.0*

Below I’ve shown the October results for all 24 strategies we’ve blogged about previously, trading the short-term VIX ETPs XIV and VXX. The majority enjoyed solid returns for the month, but about half are still upside down for the year. Read about test assumptions or get help following these strategies.

*See the end of this post for links to all of the strategies included in this report.*

XIV and VXX are of course not the only show in town. Below I’ve rerun the same tests, this time applying each strategy to the less popular (or is it “underutilized”?) mid-term VIX ETPs ZIV and VXZ *(click to zoom).*

Note that when any of these strategies signal new trades, we include an alert on the daily report sent to subscribers. This is completely unrelated to our own strategy; it just serves to add a little color to our daily report and allows subscribers to see what other quantitative strategies are saying about the market.

Good Trading,

*Volatility Made Simple*

Below I’ve shown the September results of all 24 strategies we’ve blogged about previously, trading the short-term VIX ETPs XIV and VXX. Read about test assumptions or get help following these strategies.

*See the end of this post for links to all of the strategies included in this report.*

XIV and VXX are of course not the only show in town. Below I’ve rerun the same tests, this time applying each strategy to the less popular (or is it “underutilized”?) mid-term VIX ETPs ZIV and VXZ *(click to zoom).*

Note that when any of these strategies signal new trades, we include an alert on the daily report sent to subscribers. This is completely unrelated to our own strategy; it just serves to add a little color to our daily report and allows subscribers to see what other quantitative strategies are saying about the market.

Good Trading,

*Volatility Made Simple*

There was a huge disparity in the performance of those strategies in August, based on how each responded to the month’s massive VIX spike. Those strategies that moved to a defensive position (cash or long vol) early, performed well, and those that didn’t got hammered. Below I’ve shown the August results of all 24 strategies we’ve blogged about previously, trading the short-term VIX ETPs XIV and VXX. Read about test assumptions or get help following these strategies.

*See the end of this post for links to all of the strategies included in this report.*

There were two significant points of difference between the winning and losing strategies.

The four popular “VRP” strategies, all based on comparing historical volatility versus implied volatility, performed poorly. Implied vol (ex. the VIX spot) remained higher than historical vol (by most measures) throughout the crisis, meaning all remained stubbornly short the VIX.

Most of the remaining strategies are based on comparing two or more data points across the VIX complex, such as VIX futures, the spot, or other measures of implied vol such as the VXV or VXMT indices.

Those strategies that simply take a snapshot of those data points today, without smoothing (say, through a moving average or the like), tended to perform very well, because they turned defensive quickly when the VIX complex turned backwardated. Examples include strategies comparing the VIX vs VXV, 1-month CM, or front month futures.

Strategies that smoothed those data points tended to perform less well, as they were slower to react to the crisis. Here’s the rub though. Though smoothing worked poorly here, it has been the better approach historically. The VIX complex often turns backwardated for a brief period, but due to the mean-reverting nature of the VIX, it’s almost always a head fake. Smoothing has historically led to better risk-adjusted performance, because it’s prevented strategies from getting fooled by those brief spikes. That clearly wasn’t the case in August due to the speed with which this crisis came on.

Our own strategy performed poorly for the month due to both issues above. Comparing historical vs implied volatility is a big part of our trading, and we smooth observations of the VIX complex to prevent whipsaws. Historically that’s done well for us. Not so much in this crisis.

*(click to zoom).*

Good Trading,

*Volatility Made Simple*

I’ve made some changes to the Godot’s original test for reasons I explain in a bit. Strategy results from 07/2004 trading XIV (inverse VIX) and VXX (long VIX) follow in blue, versus buying and holding XIV in grey. *Read about test assumptions, or get help following this strategy.*

Strategy rules:

- Near the close, calculate the 5-day median value of the “IVTS”, or implied volatility term-structure, where IVTS = VIX spot / 45-day constant maturity price of VIX futures
^{(1)}. - Go long XIV at the close when the 5-day median value will be < 0.91, long VXX when the 5-day median will be > 1.10, or else to cash. Hold until a change in position.
*Read about test assumptions, or get help following this strategy.*

Note that we’ve made important changes to Godot’s original test:

- We’ve extended the test back to mid-2004, and updated it up to the present, adding an additional 8+ years of data. We’re able to do this accurately using simulated data.
- In order to make an apples-to-apples comparison with other strategies we’ve tested on this blog, we’ve (a) opted to go long XIV as opposed to short VXX when the strategy calls for a short VIX position, and (b) increased position sizes to 100% (from 60%). Note that a short VXX position would have led to slightly different results, but not dramatically so. A good strategy will still be a good strategy (and vice-versa) with either approach.

As mentioned in the opening paragraph, Mojito 3.0 is similar to a number of strategies we’ve tested on this blog, in that trades are based on comparing a shorter-term measure of implied vol relative to a longer-term measure.

These types of strategies have worked historically because of the tendency to overestimate future volatility that exists across the VIX complex when the VIX complex is in its “normal” contangoed state ^{(2)}: the VIX spot tends to overestimate future realized vol, VIX futures to overestimate the spot, more distant months to overestimate more than nearer months, etc.

These strategies are each using different metrics to judge whether the VIX complex is in that contangoed state, or more specifically, a contangoed state that is likely to mean that VIX futures are overestimating the eventual spot.

Other examples of this type of strategy include: comparing first vs second month futures, VIX vs front month futures, VIX vs 1-month CM, VIX vs VXV, V&M’s VIX:VXV ratio, QT’s VXV:VXMT ratio, Evolution Capital’s strategy, and many more.

Is this strategy better or worse than those other variations?

That’s impossible to say. I think the broader concept has merit for sure, and it’s a broad concept that we use in our own trading, but I also think that over the long-term, taking a more holistic view that considers many of the key data points across the VIX complex together (rather than two particular data points alone) is probably the more robust solution.

A big thank you to Godot Finance for the thoughts and the opportunity to add our two cents here.

When the strategies that we cover on our blog (including this one) signal new trades, we include an alert on the daily report sent to subscribers. This is completely unrelated to our own strategy’s signal; it just serves to add a little color to the daily report and allows subscribers to see what other quantitative strategies are saying about the market.

Click to see *Volatility Made Simple’s* own elegant solution to the VIX ETP puzzle.

Good Trading,

*Volatility Made Simple*

*Wonk notes:*

- The “45-day constant maturity price of VIX futures” is calculated based on a weighted average of 1st and 2nd month futures when the number of calendar days to expiration for the second month is greater than 45 days, otherwise it is based on a weighted average of 2nd and 3rd month futures.
- I’m using the term “contangoed” loosely here to mean a more distant measure of implied volatility is priced higher than a nearer measure, rather than the stricter definition of futures vs the spot.

There was a wide disparity in the performance of those strategies in July, based on how each responded to the VIX spike that began in late June and carried into the early part of the month. Many moved to defensive positions (cash or long vol) just as the VIX began to fall. Below I’ve shown the July results of all 23 strategies we’ve blogged about previously, trading the short-term VIX ETPs XIV and VXX. Read about test assumptions or get help following these strategies.

*See the end of this post for links to all of the strategies included in this report.*

The month’s top performing strategies all maintained a stubborn inverse vol position in the face of the VIX spike. That was a gutsy move for sure, and one that could have turned sour quickly had the Greek debacle du jour not sorted itself out so quickly.

We also took the same stubborn inverse VIX position in our own portfolios based on statistical reasoning. Actual stock market volatility didn’t support the level of fear that VIX futures and the spot were showing. When those data points conflict, it’s usually best to side with actual realized vol over measures like VIX futures and the spot, as historically, they’ve proven themselves bad forward-looking predictors.

We ended up underperforming in July however after reducing allocation for four days during the subsequent market recovery for the *opposite* reason as was described above (i.e. our model read implied vol as being *too low* relative to historical vol). That was an untimely move as the VIX spot was able to maintain readings in the 12’s through most of the remainder of the month.

*(click to zoom).*

Good Trading,

*Volatility Made Simple*

*Stategies included in this report: First vs Second Month Futures, VIX vs Front Month Futures, VIX vs 1-Month Constant Maturity, VIX vs VXV Indices, V&M’s VIX:VXV Ratio, TM’s RSI(2), DFTB’s StDev Strategy, DFTB’s Spread Strategy, DDN’s Momentum Rotation, DDN’s VRP Strategy, 10/100-Day MA Crossovers, TWP’s Quadratic Fit, NAS’s VIX Futures Momentum, S&P 500 50/200-Day Crossovers, Brute Force Optimized VRP, LI’s Bollinger Band Strategy, LI’s SMA Crossovers, Evolution Capital Strategy, TTO’s VRP Strategy, MS’s Mean-Reversion, Macro Investor Strategy, QT’s VXV:VXMT Strategy, TTO’s Optimized VRP*

Strategy performance in June essentially boiled down to the position held during the massive VIX spike on Monday, when XIV/ZIV fell a whopping -16.7%/-5.8%. Because of the lack of significant tells in the VIX complex on the preceding Friday, almost all of the 23 strategies were short vol into the abyss. Below I’ve shown the June results of the 23 strategies we’ve blogged about previously, trading the short-term VIX ETPs XIV and VXX. Read about test assumptions or get help following these strategies.

*See the end of this post for links to all of the strategies included in this report.*

The month’s four top performing strategies were all in cash during Monday’s spike, either because they’re mean-reversion plays and the VIX was low relative to recent history (MS’s Mean-Reversion and TM’s RSI(2)), or because they’re term-structure plays and key data points across the VIX complex weren’t sufficiently contangoed (TWP’s Quadratic Fit and the Evolution Capital strategy).

As previously mentioned however, there was little in the way of significant tells at Friday’s close of the impending doom on Monday (ex. the spot closed low, with little premium between futures and the spot), so I chalk that success up more to “dodging the bullet” than foreseeing the future. We track a lot of strategies here, and a handful are bound to be on the sidelines on any given day.

*(click to zoom).*

Good Trading,

*Volatility Made Simple*

Most of these strategies turned in solid performances in May on the back of yet another strong month for inverse VIX ETPs like XIV and ZIV. Below I’ve shown the May results of the 23 strategies we’ve blogged about previously, trading the short-term VIX ETPs XIV and VXX. Read about test assumptions or get help following these strategies.

*See the end of this post for links to all of the strategies included in this report.*

There was a fairly consistent premium across the VIX complex in May (between historical vol, various measures of implied vol, and VIX futures). Most of these strategies key off of comparing some variation of those data points, hence the reason why most of these strategies maintained a short VIX position throughout the month. At the moment, all but 3 of the 23 strategies are short the VIX.

There will be a significant uptick in volatility at some point (perhaps tomorrow or perhaps months from now), and many of these strategies will almost certainly get caught trading the wrong direction for some length of time, but until then, it’s useful to remember that low vol regimes like these can continue for far longer than sanity would expect.

*(click to zoom).*

Good Trading,

*Volatility Made Simple*

Most of these strategies turned in solid performances for the month on the back of a strong run in inverse VIX ETPs like XIV and ZIV. Below I’ve shown the April results of the 23 strategies we’ve blogged about previously, trading the short-term VIX ETPs XIV and VXX. Read about test assumptions or get help following these strategies.

*See the end of this post for links to all of the strategies included in this report.*

There was a consistent premium across the VIX complex for the entire month of April (between historical vol, various measures of implied vol, and VIX futures). Many of these strategies key off of comparing some variation of those data points, hence the reason why most of these strategies maintained a short VIX position throughout the month.

*(click to zoom).*

Good Trading,

*Volatility Made Simple*

Most of these strategies turned in solid performances for the month. The popular “VRP” strategies performed particularly badly. Below I’ve shown the March results of the 23 strategies we’ve blogged about previously, trading the short-term VIX ETPs XIV and ZIV. Read about test assumptions or get help following these strategies.

*See the end of this post for links to all of the strategies included in this report.*

The popular “VRP” strategies (DDN’s VRP, Brute Force VRP, TTO’s VRP, and TTO’s Optimized VRP) underperformed for the month as a result of miscalling the divergence in the VIX complex I discussed previously.

In short, implied volatility mid to late-month was low relative to historical volatility (favoring a long VIX play), but at the same time, VIX futures traded at an extra large premium to implied volatility (favoring a short VIX play). The VRP strategies, which key off of the relationship between implied and historical vol, ended up trading on the wrong side of that divergence.

This of course underscores the importance of taking a more holistic view when trading the VIX (or anything else for that matter) and not marrying any one single trading concept (read more and more).

*(click to zoom).*

Good Trading,

*Volatility Made Simple*