Backtest: Comparing the VIX Index to 1-Month Constant Maturity VIX Futures

This is a twist on a common strategy for trading VIX ETPs (like XIV and VXX) that we’ve covered previously: comparing the VIX index to front month VIX futures. Traders often use this simple approach to judge whether the VIX futures term-structure is in contango (favoring XIV) or backwardation (favoring VXX).

In this variation we look at comparing the VIX index to the 1-month constant maturity price of VIX futures. Strategy results trading XIV (inverse volatility) and VXX (long volatility) are in blue, compared to buying and holding XIV in grey, from mid-2004 to present:


Strategy rules:

  • Go long XIV at today’s close if the VIX index will close below the 1-month constant maturity price of VIX futures, or go long if it will close above. Hold until a change in position.
  • Read about test assumptions. Get help following this strategy.

By 1-month “constant maturity” price I’m referring to the mix of first and second month VIX futures contracts that achieves a 1-month weighted average maturity.

The original strategy, comparing the VIX to front month futures, is a bit messy, because the front month contract represents something very different depending on how long remains until expiration. It represents expectations as much as a full month in the future when it initially becomes the front contract, but this incrementally decreases to zero days as the front month contract itself marches towards expiration.

Regardless of what the stats might say, this twist on the strategy (while less convenient to follow) is intuitively more logical, because we’re comparing the VIX to a fixed value.

Summary stats below include both the original and revised strategy.


The recent negative performance in this strategy is a result of the observation I made in my previous post: On Market Strength and the Whipsaw Regime. In short, because of the extreme (but ultimately, unsustainable) market strength of the last 1+ year, what have traditionally been signs of impending weakness in XIV/ZIV (in this case, VIX > 1-month constant maturity) has repeatedly caused many of these simple strategies to move to a defensive posture (cash or long vol) just as the market is making a rebound.

Had we moved to cash rather than VXX, the equity curve would look as follows (XIV/VXX in blue, XIV-only in orange):


I show these types of simple strategies not because I think they are sufficiently predictive to stand on their own (to the contrary, I’m certain that they’re not). I show them because I think they make good components of broader, more complete approaches.

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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

Posted in Strategy Backtests.