Evolution Capital’s VIX Trading Strategies (Part II)

In this series I’m breaking down the strategies in Evolution Capital’s paper Volatility: A New Return Driver? (Read part one.) In this post I look at strategy #3 from the paper, which is designed to capture contango (or more accurately, volatility risk premium) via the inverse VIX ETN XIV. Strategy results from 07/2004 follow.


Strategy rules: Go long XIV at the close when all of the following conditions are met: (a) the VIX index will close below the front month VIX futures contract, (b) the front month contract will close below the second month, and (c) the current roll yield is greater than the 20-day average of the roll yield. Hold until any of those conditions are not met.

Read about test assumptions, or get help following this strategy. Note that our backtest looks very different than the one presented in Evolution Capital’s paper. In the footnote I explain why.


We’ve tested similar strategies in the past based on comparing the VIX vs front month futures or front vs second month futures. While I don’t think simply comparing any two data points from the volatility complex is a very good strategy all by itself, I do think these data points are important to consider for all VIX traders.

The unique addition of Evolution Capital’s strategy is comparing the current roll yield to the 20-day average roll yield, so in the stats above I also included an alternative strategy that ignores this 20-day roll yield rule.

At first glance it appears that the 20-day RY rule is ineffective (note higher Sharpe ratio and UPI when ignoring it), but I think that’s debatable. Ignoring the rule has increased allocation by almost 80% (68% vs 38%), but has only increased return by about a third (43% vs 33%).

That means that the trades that the 20-day RY rule would have skipped were less effective on average. The next graph confirms this. Here I’ve shown the original strategy (blue) versus those trades that the 20-day RY rule skipped (grey). Note that in this particular graph I’ve ignored transaction costs and slippage.


The graph shows that for the last 7 years, the 20-day RY rule would have skipped a number of ineffective trades. For traders concerned with reducing their time in the market, the RY rule might warrant further testing.

A big thank you to Evolution Capital for posting their paper and I look forward to testing other strategies from the paper in the coming week. Click to see Volatility Made Simple’s own elegant solution to the VIX ETP puzzle.

Good Trading,
Volatility Made Simple

Wonk note: The equity curve in our test looks very different than the one presented in Evolution Capital’s paper. The strategy which we’ve tested here is supposed to be short VIX only (i.e. long XIV), but it’s clear from the sharp increase in value seen during the 2008 GFC in the original paper, that the paper is mistakenly showing the results of an unknown long/short VIX strategy. I’m sure this was unintentional on the authors’ part and we previously brought the mistake to the authors’ attention.

Posted in Strategy Backtests.