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. 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