The Basic “Contango Rule” Strategy for VIX and Inverse Volatility. Let's try a simple strategy, go short VXX all the time. VIX offers a bird’s eye view of real-time greed and fear, while providing a snapshot of the market’s expectations for volatility in the next 30 days. contango) In this study, we will create a strategy with the term structure effect of VIX futures and hedge the term structure risk with the S&P500 futures. The Contango Effect. The best investment analysis of the VIX futures market and related exchange traded products. First, let's take a look at the VIX-VXV relationship: Real-time analysis of the VIX Futures Curve (VX), the CBOE spot VIX indices (VXST, VIX, VXV, VXMT) and the S&P 500 index (SPX). 3. Learn how to trade volatility ETPs for profit. Get VIX and VIX Futures live and historical data, analytics, trade alerts and other research. The “contango” trap; The VIX futures market is said to be in a state of contango – that is, when the current price is lower than the future price. There are many examples of this since the inception of these volatility ETPs. Another concern is that the XIV and VXX are heavily influenced by the Contango present in the front month VIX futures. The trading rules are as follows: Buy (or Cover) VXX if 5-Day Moving Average of VIX/VXV >=1 (i.e. It’s well known that long volatility Exchange Traded Products (ETPs) like VXX, UVXY, and TVIX often experience devastating losses during market quiet spells—even when the value of the VIX is staying relatively stable. In this article, I discuss a strategy for trading VXX. The VIX Index, sometimes called the “fear index”, is a market sentiment indicator that measures the market’s expectations of the volatility for the coming 30 days. First time in a while contango is benefiting VXX in quite a while. Strategy thesis: VXX experiences most drag when the futures curve is in a steep contango. The $VIX futures term structure in contango, the $VVIX Index falls over 8 points to 111 handle & Russell Rhoads breaks down Feb $VIX options trading as the … source From 2011 to today the annual performance was more than 70% per year. One of the problems with this type of strategy is that volatility in general can and does sometimes rise even when the VIX futures term structure remains upward sloping and in contango. Harvesting Contango by investing in inverse volatility This Strategy harvests contango and achieves very high returns investing in inverse volatility. There are several ways that you can short the VIX. An investor that simultaneously buys VIX and S&P 500 Index puts for the same expiration month can capture this volatility premium. Risks with trading the VIX. I’m working on similar strategy using XIV. This happened on Sept. 9, when the VIX spiked 40%, but closed below 20. It … Trading Strategy for When VIX is in Contango. Traders can also take the opposite of UVXY, which is the SVXY. Contango and backwardation are two concepts related to futures contracts that need to be understood in VIX trading because VIX ETFs buy or sell some combination of futures contracts. The rules of the VIX strategy are explained below: A falling VIX index combined with a falling S&P 500 is a bullish divergence. Very basic strategy that goes long on a VIX ETF whenever the futures curve shows signs of backwardation and gets out when it shows signs of contango. The obligation of the VXX trading strategy is to match the performance of the S&P 500 VIX Short-Term Futures Index Total Return and it maintains positions in the front two-month Volatility Index (VIX) futures contracts. contango: Numeric vector of contango values at the end of each trading day (or week, month, etc.). “The VIX term structure…can also be used for constructing trading strategies that attempt to earn the term structure risk premium, when it is in contango. The futures curve is approximated by the VIX-VXV relationship. Contango extremes tend to coincide with VIX and S&P 500 highs/lows (see most recent contango low – dashed green line) Higher contango tends to benefit XIV Timing the tailwind trade. Should be same length as contango and date-shifted one value to the right. Here is a recent working paper making this argument -- note the last sentence of the abstract. SVXY tracks the opposite of the VIX, such that if the VIX goes down, SVXY goes up. Backwardation generally happens when there is elevated fear and volatility in the market, and has occurred on roughly 17% of trading days since 2004. VIX futures backwardation is the opposite of Contango. An understanding of VIX technical analysis can mitigate the profit-dampening effect of contango by identifying levels and turning points where funds will lose trend momentum. When the VIX futures curve is upward sloped (in contango), the VIX is expected to rise because it is low relative to long-term average levels and vice versa for the downward sloped VIX future curve. This strategy is also similar to riding the yield curve in bond . And even if VIX just is a synthetic index, it can be traded through futures, or funds that invest in VIX futures contracts. Times benefit from the term structure features in volatility futures like other asset classes, futures. Has an unusually high premium over VIX lower levels, VIX futures, everyone buy. 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