This is a test of a simple momentum indicator for trading VIX futures (or in our case, VIX ETPs) from the excellent NAS Trading. I show results of the indicator traded alone first, but as I’ll cover further along in the post, I think the indicator is most useful as an addition to an existing strategy.
First, below I’ve shown results of the indicator used alone to trade XIV (inverse VIX) in blue, from mid-2004 to present. For comparison, I’ve also shown the opposite strategy rules, buying when the strategy says to sell (and vice-versa), in grey.
Strategy rules: go long XIV at the close when the 10-day moving average of “VIX futures” crosses below the 20-day moving average, otherwise to cash. Hold until a change in position.
NAS used a continuous futures contract to represent “VIX futures”, but for simplicity’s sake I’ve used the 30-day constant maturity price of VIX futures.
By only going long XIV (inverse VIX) when VIX futures are showing weakness, this is essentially a momentum strategy.
Results have been fairly stable across similar parameter values (other than 10 and 20 days).
The strategy hasn’t done particularly well generating big returns, but has done well avoiding the worst of the drawdowns in XIV, hence the reason why I opened this post by saying that I think the indicator is most useful as an addition to an existing strategy.
To illustrate, below I’ve shown the backtested results of our own strategy, traded only when NAS’s indicator either agreed with our trade (blue) or disagreed with our trade (grey).
Note the multiple not-insignificant drawdowns that the indicator would have prevented. I wouldn’t add the indicator as a component of our strategy because it would take us out of the market so frequently and because I’m comfortable with the level of risk we currently carry, but more risk-averse investors might feel otherwise.
Most quantitative VIX ETP strategies traders employ are based on some metric other than price (like the shape of the futures term-structure, or estimates of the volatility risk premium), but I think that there might be value in price-based indicators like this momentum strategy from NAS or a trend-following strategy like 10/100-day crossovers.
A big thank you goes out to NAS Trading for publicly posting this strategy.
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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.
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