With the VIX being so low, many investors believe that now is the time to go long volatility. This belief mainly stems from the mean reversion property of the VIX. However, we should note that
- The speed of mean reversion in the low volatility regime is slower than it is in the high volatility one
- The clustering of volatility is also different in low/high volatility regimes
- Spot VIX is not tradable. Therefore, we should use VIX ETFs or futures that have already discounted the mean reversion property of spot VIX, to a certain degree.
The above points make the development of a long volatility trading/hedging system difficult.
A recent research report by Macro Risk Advisors (MRA) compared two trading strategies for going long volatilities. The rules are as follows:
- Buy VXX when the spot VIX is low
- Buy VXX when the spot VIX was low in the previous month and now is rising
Their results show that buying volatility when the VIX is low is a losing strategy, while buying volatility when the VIX is increasing is a winning strategy.
Last year, we published a VIX trading system based on the Roll Yield. The graph below shows the equity line of going long VXX when the volatility term structure goes from contango to backwardation (length of moving average is 10 days), i.e. when the VIX is increasing.
Equity line for the Roll Yield strategy, long only.
As we can see, our system did not lose money. This is consistent with the results presented in the MRA’s report. However, it also pointed out that results of the simple backtest are not enough to conclusively say that their trading strategies are robust, but it clearly illustrates the risk of buying volatility when it’s low.
Similarly, in our own test, the sample size is too small, so we cannot say that we have developed a reliable system. But this and other (not shown) research results, together with MRA’s backtests, can provide an evidence that just buying VXX or VIX futures when volatility is low is not a good strategy.
Further questions
What's your question? Ask it in the discussion forum
Have an answer to the questions below? Post it here or in the forum
Company to be in San Francisco January 8-12, 2023, during 41st Annual J.P. Morgan Health Care Conference WOBURN, Mass. and HAIFA, Israel, Jan. 03, 2023 (GLOBE NEWSWIRE) — Minovia Therapeutics, a clinical-stage global biotechnology company, today announced that the Company will be presenting at the Biotech…
King Dollar’s reign (definitely) coming to an end, bonds bouncing and emerging markets rising again are just some of the trades international money managers are betting on in 2023. Sky-high inflation and the global gut-punch of nearly 300 central bank interest rate hikes over the…
Masimo SpHb Demonstrated “Clinically Acceptable Accuracy” of Hemoglobin Measurement, Even at Low Hemoglobin Levels NEUCHATEL, Switzerland — Masimo (NASDAQ: MASI) today announced the findings of a prospective study published in the Egyptian Journal of Anesthesia in which Dr. Mohamed Ibrahim Beleta and colleagues at Cairo…
NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR DISSEMINATION IN THE UNITED STATES SASKATOON, Saskatchewan & LONDON — Gensource Potash Corporation (“Gensource” or the “Company”) (AIM/TSXV: GSP), a fertilizer development company focused on sustainable potash production, today announced that on December 30, 2022, it…
