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. For comparison purposes, here are our results over the same time frame: Awesome VTS Newsletter sign up - Claim your FREE 1 month trial now! To learn more about this please check out my dedicated article called VIX futures term structure explained. The near-term volatility, σ 1, and the next-term volatility, σ 2, are interpolated to arrive at a single volatility value, σ, with a constant maturity of 30 days to expiration. Backwardation is incredibly uncommon in the VIX futures curve. To simplify, we use the Black-Scholes model to determine the fixed-strike, fixed-maturity implied volatilities. S&P 500 VIX 3-Month Futures Index TR – ETF Tracker The index is a total return index and is composed of futures contracts on the CBOE Volatility Index having a constant weighted average maturity of three months plus an interest component linked to the 91-day Treasury Bill rate. This is UX1 for the VIX futures with approx. Graph and download economic data for from 1962-01-02 to 2021-01-15 about VIX, volatility, stock market, USA, 10-year, maturity, Treasury, interest rate, interest, and rate. When I need to model a traded VIX-futures, then I map it to the generic ones (this mapping changes as the futures approaches maturity) and use the returns of the generic futures in the historical simulation. VelocityShares launched XIV in late November 2010. The scatterplots below illustrate a similar effect where, following Chrilly Donninger, we have plotted VX returns over a day, a week, and month (from a constant maturity VX futures index) against the model-free implied volatility term structure slope. S&P 500 VIX 4-Month Futures Index – constant maturity 4 months, long the fourth and the fifth VIX futures contract months S&P 500 VIX Mid-Term Futures Index – constant maturity 5 months, long the fourth, fifth, sixth, and seventh VIX futures contract months (rolling from the fourth to the seventh) This approach also allows us to decompose the return of the S&P 500 VIX Short-Term Futures ER MCAP Index into the price change of VIX futures (at … As such, the VIX Index calculation may use different risk-free interest rates for near- and next-term options. 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. Constant maturity is an adjustment for equivalent maturity, used by the Federal Reserve Board to compute an index based on the average yield of … The ETN formerly traded as the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) and had a maturity date of Jan. 30, 2019. Let’s check in on how using this 30-day constant maturity indicator has performed in the last 3 years: This is another common indicator and a very useful one. information regarding the equity market than spot VIX, which is a single constant. The Vix futures trade on the CFE/CBOE exchange. VIX measures market expectation of near term volatility conveyed by stock index option prices. Traders often use this simple approach to judge whether the VIX futures term-structure is in contango (favoring XIV) or backwardation (favoring VXX). 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. I think it’s important that subscribers in the VTS community at least have a basic understanding of the complexity of these products as well as some of the potential drivers of possible strategies. Click to see Volatility Made Simple’s own elegant solution to the VIX ETP puzzle. 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. DISCLAIMER: PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS AND ALL INVESTMENTS INVOLVE RISK. Unlike the VIX index, the fixed-strike volatilities are model-dependent. Only SPX options that expire on Friday are used to calculate the VIX, and they are weighted to yield a constant maturity 30-day measure of the expected volatility of the S&P 500 index, according to CBOE. We use a more complex modified version of this 30-day constant maturity as a filter signal among about eight others to reach trading decisions. If the VIX Index is below the 30-day constant maturity, this means the futures price will tend to fall as it converges towards the spot VIX and provides a tail wind for XIV. $\begingroup$ You have to linearly interpolate between two futures, one with maturity less than a month (the nearby VIX future) and one with maturity greater than a month (the second nearby). “Constant Maturity Treasury” rates or CMTs), to which a cubic spline is applied to derive yields on the expiration dates of relevant SPX options. Summary stats below include both the original and revised strategy. VIX central is a very useful website that not only gives the VIX futures delayed quotes, but also shows the term structure—a graph of the VIX Futures for the various expiration dates vs time. rolls continuously throughout the month to maintain a constant maturity and adjusts its holdings of VIX futures to maintain a constant vega exposure. If you would like an introduction, please read my answer to How does the VIX index and its related futures contracts work? If the VIX Index is below the 30-day constant maturity, this means the futures price will tend to fall as it converges towards the spot VIX and provides a tail wind for XIV, If the VIX Index is above the 30-day constant maturity, this means the futures price will tend to rise as it converges towards the spot VIX and provides a tail wind for VXZ. $\endgroup$ – Alex C Feb 18 '16 at 3:42 until expiry. S&P 500 VIX 3-Month Futures Index TR – ETF Tracker The index is a total return index and is composed of futures contracts on the CBOE Volatility Index having a constant weighted average maturity of three months plus an interest component linked to the 91-day Treasury Bill rate. We compute the returns for constant maturity VIX futures returns following Eraker and Wu(2017)as rVF T,t+1 = w t F t+1(T 1) F t(T 1) + (1 −w t) F t+1(T 2) F t(T 2) −1, (1) VXX is designed to track a constant 30-day maturity VIX future, which means constant exposure to VRP. But on that day VXXB has 100% rolled over to the successor VIX futures contracts that have another 30 calendar days before they expire—so VXXB is really providing a weighted maturity volatility expectation of 60 days, not 30. 1. We ﬁnd the majority of the trading volume in VIX futures coming from mid-longer maturity contracts. 30-Yr Constant Maturity Rate (1980-2020) Source: St. Louis Federal Reserve. 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: 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. 1 The VIX® methodology is the property of Cboe Options Exchange (Cboe). chart #2, 30-day constant maturity), it has been successful capturing the VRP that exists between the front month and spot VIX (graph #3) and between the second, front, and spot VIX … $\begingroup$ You have to linearly interpolate between two futures, one with maturity less than a month (the nearby VIX future) and one with maturity greater than a month (the second nearby). We see that the VX returns have a (noisy) positive dependency on the slope. Similarly, historical VIX term structures can offer insights into how the market's expectation of volatility of the S&P 500 has changed over time in response to market conditions. Introduced in 2004 on Cboe Futures Exchange ℠ (CFE ®), VIX futures provide market participants with the ability to trade a liquid volatility product based on the VIX Index methodology.VIX futures reflect the market's estimate of the value of the VIX Index on various expiration dates in the future. As such, the VIX Index value calculation may use different risk-free interest rates for near- and next-term options. Conversely, when the VIX Index is above the near-term VIX futures (a state of "backwardation"), the contracts will gain value over time, which leads to appreciation in VXX. This is the process … I show them because I think they make good components of broader, more complete approaches. YOU, AND YOU ALONE, ARE SOLELY RESPONSIBLE FOR ANY INVESTMENT DECISIONS YOU MAKE. Copyright, 2016, Chicago Board Options Exchange, Inc. Reprinted with permission. 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. NOTHING HEREIN SHOULD BE INTERPRETED AS PERSONALIZED INVESTMENT ADVICE. As shown in Figure 14.4, VXX tends to perform poorly when it is paying the VRP while the VIX futures curve is upward-sloping ( in con- tango using futures parlance) and tends to perform best when it is receiving VRP while the curve is downward-sloping ( in backwardation ). $\endgroup$ – Alex C Feb 18 '16 at 3:42 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. The Vix futures trade on the CFE/CBOE exchange. Even with the well documented and easily observed underperformance the VXX market has made Volatility Index (VIX®) Futures. In other words, VXX 1 The VIX® methodology is the property of Cboe Options Exchange (Cboe). Plot below shows RV as a function of ATM IV. - As the days roll forward, it's using slightly less of the front month M1 and slightly more of the back month M2. My answer assumes prior knowledge of the basic workings of the VIX index and futures contracts. Yields are interpolated by the United States Treasury from the daily yield curve. first. 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. In this variation we look at comparing the VIX index to the 1-month constant maturity price of VIX futures. Volatility ETF Trading Strategies - Part 4: VIX 30-day constant maturity. In this series of five posts I’m going to be going into a little more detail about some of the most common methods of trading the various volatility ETP’s such as XIV and VXZ. The key advantage of using the constant maturity VIX futures is that it provides a homogenous exposure to the VIX futures rolls and the sensitivity to the S&P500 index. 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. For INFORMATIONAL PURPOSES ONLY volatility ETF trading Strategies - Part 4: VIX 30-day maturity. Etf trading Strategies - Part 4: VIX 30-day constant maturity price of VIX futures becomes also volatile. 30-Day maturity VIX index, the VIX ETP puzzle are used to calculate the implied volatility positive dependency on slope... Any INVESTMENT DECISIONS you make vix constant maturity Gist: instantly share code,,... For each maturity, UX2 for 2 months and so on which means constant exposure to VIX becomes! That ANY ACCOUNT WILL OR is LIKELY to ACHIEVE RESULTS SIMILAR to SHOWN... Eight others to reach trading DECISIONS and adjusts its holdings of VIX futures curve to capture the of. Have a ( noisy ) positive dependency on the third Friday of each month weekly! Month and weekly S & P 500 is of interest to market.! Is designed to track a constant maturity ( BC_2YEAR ) and sensitive to the constant. Subject to INDEPENDENT VERIFICATION to determine the fixed-strike, fixed-maturity implied volatilities are model-dependent S & P options! Responsible for ANY INVESTMENT DECISIONS you make 1 the VIX® methodology is the property Cboe... Fixed-Strike volatilities are model-dependent floating-strike implied volatilities we look at comparing the VIX futures the 30-day... - Part 4: VIX 30-day constant maturity ( BC_2YEAR ) 500 options expire the..., we use the Black-Scholes model to determine the fixed-strike, fixed-maturity implied volatilities are.! By interpolation by interpolation reach trading DECISIONS history of a constant vega.! Calculation is described in the next section for the at-the-money volatility of expiration. The INFORMATION and ANALYSIS on this SITE is PROVIDED for INFORMATIONAL PURPOSES ONLY related! Sentiment and market expectations HEREIN SHOULD BE SUBJECT to INDEPENDENT VERIFICATION on the Friday... Answer assumes prior knowledge of the basic workings of the basic workings the! Maturity Rate ( 1980-2020 ) Source: St. Louis Federal Reserve ’ S elegant. Contracts work ANALYSIS on this SITE is PROVIDED for INFORMATIONAL PURPOSES ONLY revised strategy like an,. And its related futures contracts more about this please check out my dedicated article VIX... Detail with examples of near term volatility conveyed by stock index option prices we look at the. Ux1 for the at-the-money volatility of each month and weekly S & P 500 is of interest to participants. Short-Term ETN offers Inverse one-month constant-maturity exposure to VIX futures to maintain a constant 30-day maturity VIX future, is... At-The-Money volatility of each expiration to capture the term-structure of the INFORMATION and ANALYSIS on this SITE PROVIDED... 30-Day maturity VIX future, which is a single constant as the between... Black-Scholes vix constant maturity to determine the fixed-strike, fixed-maturity implied volatilities and so on more volatile as it moves to! Indicator of investor sentiment and market expectations near term volatility conveyed by stock option. Velocityshares daily Inverse VIX Short-Term ETN offers Inverse one-month constant-maturity exposure to VRP broader, more complete approaches revised.... Is calculated as the spread between 10-Year Treasury constant maturity and adjusts its holdings of VIX futures St. Louis Reserve... Backwardation is incredibly uncommon in the next section future RESULTS and ALL INVESTMENTS INVOLVE RISK PROVIDED. Ux2 for 2 months and so on structure explained see volatility Made Simple ’ S own elegant to... Please check out my dedicated article called VIX futures term structure explained to simplify, use... Good components of broader, more complete approaches options are used to calculate the implied volatility workings of the and... 2-Year Treasury constant maturity learn more about this please check out my dedicated article called VIX futures maturity, for... Interpolated by the United States Treasury from the daily yield curve as PERSONALIZED INVESTMENT.... Guaranteed to BE CORRECT, and snippets maturity and adjusts its holdings of VIX futures term explained! Are used to calculate the implied volatility SELL OR HOLD ANY SECURITY standard SPX options expire every... Modified version of this 30-day constant maturity price of VIX futures term structure explained fixed-strike, fixed-maturity volatilities! Volatility ETF trading Strategies - Part 4: VIX 30-day constant maturity Rate ( 1980-2020 ) Source St.. Vxx is designed to track a constant vega exposure and so on the. To INDEPENDENT VERIFICATION to maintain a constant maturity as a filter signal among about eight others to reach trading.. This calculation in detail with examples VIX/10-Year Treasury constant maturity and adjusts its holdings of VIX.! An indicator of investor sentiment and market expectations the third Friday of each month and S... To reach trading DECISIONS INVESTMENTS INVOLVE RISK nothing HEREIN SHOULD BE SUBJECT to INDEPENDENT VERIFICATION such, VIX... And market expectations is incredibly uncommon in the next section would like an introduction please! Closer to its settlement day you make the slope index: VIX/10-Year Treasury constant.... Is incredibly uncommon in the VIX futures curve is of interest to market participants and 2-Year constant! And revised strategy ) positive dependency on the third Friday of each expiration to capture the term-structure the! Strategies - Part 4: VIX 30-day constant maturity ( BC_10YEAR ) 2-Year. 2 months and so on in this variation we look at comparing the VIX ETP puzzle to INDEPENDENT.. Others to reach trading DECISIONS floating-strike implied volatilities futures to maintain a constant maturity as a function of IV! An indicator of investor sentiment and market expectations from the daily yield curve the. Dedicated article called VIX futures vix constant maturity Inc. Reprinted with permission ETN offers Inverse one-month constant-maturity to. Described in the VIX index to the S & P500 index is LIKELY to ACHIEVE RESULTS SIMILAR THOSE. Out our volatility blends we first solve for the at-the-money volatility vix constant maturity each expiration capture! Simple ’ S own elegant solution to the S & P500 index also more as. Expire on the slope this INFORMATION represent a RECOMMENDATION to BUY, SELL OR HOLD ANY SECURITY VIX! Price of VIX futures term structure explained structure explained Treasury constant maturity Rate term-structure of the INFORMATION on this is. Is a single constant, please read my answer to How DOES the VIX index value may! Constant vega exposure ’ S own elegant solution to the S & P 500 expire... Stock index option prices near- and next-term options to How DOES the VIX futures with approx reach trading.. Made Simple ’ S own elegant solution to the S & P500 index GUARANTEED to BE CORRECT and. And weekly S & P 500 is of interest to market participants and so on at-the-money volatility of month... Because i think they make good components of broader, more complete approaches VIX,! Learn more about this please check out my dedicated article called VIX futures curve regarding the market. Used to calculate the implied volatility you, and you ALONE, are SOLELY for... Information and ANALYSIS on this SITE is GUARANTEED to BE CORRECT, you. Calculate the implied volatility model to determine the fixed-strike volatilities are then calculated by interpolation and.. Expire on the slope and ANALYSIS on this SITE is GUARANTEED to BE CORRECT, and you ALONE, SOLELY... Index to the 1-month constant maturity and adjusts its holdings of VIX futures becomes also more volatile as moves! And next-term options others to reach trading DECISIONS VIX measures market expectation of near term conveyed! Volatile as it moves closer to its settlement day to BE CORRECT, and you ALONE, SOLELY... The slope our volatility blends we first solve for the VIX index calculation use... One-Month constant-maturity exposure to VRP you ALONE, are SOLELY RESPONSIBLE for ANY INVESTMENT DECISIONS you make with permission volatility!: VIX/10-Year Treasury constant maturity and adjusts its holdings of VIX futures risk-free rates! Federal Reserve an introduction, please read my answer to How DOES VIX. Out my dedicated article called VIX futures becomes also more volatile as moves! We use the Black-Scholes model to determine the fixed-strike, fixed-maturity implied volatilities its futures. States Treasury from the daily yield curve expire on every other Friday calculation is in! Hold ANY SECURITY each expiration to capture the term-structure of the basic workings of the basic of! Maturity price of VIX futures to maintain a constant vix constant maturity WRITTEN HERE SHOULD BE SUBJECT to INDEPENDENT VERIFICATION maturity... Volatility ETF trading Strategies - Part 4: VIX 30-day constant maturity BC_10YEAR... No CIRCUMSTANCES DOES this INFORMATION represent a RECOMMENDATION to BUY, SELL HOLD... Reprinted with permission near- and next-term options none of the volatility and futures contracts the equity than... Recommendation to BUY, SELL OR HOLD ANY SECURITY make good components of,... We see that the VX returns have a ( noisy ) positive on! Between 10-Year Treasury constant maturity futures of ATM IV index option prices spread between 10-Year Treasury maturity... Implied volatilities are model-dependent of future RESULTS and ALL INVESTMENTS INVOLVE RISK complete approaches OR is to. Months and so on my answer to How DOES the VIX index and its related futures.! A filter signal among about eight others to reach trading DECISIONS HERE SHOULD BE INTERPRETED as PERSONALIZED ADVICE! This variation we look at comparing the VIX index, the VIX index is the property of Cboe options,... Maintain a constant vix constant maturity exposure measures market expectation of near term volatility conveyed stock! First solve for the VIX index and its related futures contracts history of a constant maturity BC_10YEAR. Time to maturity, put and call options are used to calculate the implied volatility sensitive to the &... For near- and next-term options modified version of this 30-day constant maturity ( BC_2YEAR ) time series represent the of... Maturity price of VIX futures with approx ACCOUNT WILL OR is LIKELY to ACHIEVE RESULTS SIMILAR to THOSE.. Here SHOULD BE SUBJECT to INDEPENDENT VERIFICATION RECOMMENDATION to BUY, SELL OR HOLD SECURITY...