Should We Buy VIX Futures When The Spot VIX is Low?

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

LATEST NEWSTeck Donates $10-million to Chilean Nature Fund to Support Chile’s Protected Marine Areas Program and Juan Fernández Archipelago
Teck Donates $10-million to Chilean Nature Fund to Support Chile’s Protected Marine Areas Program and Juan Fernández Archipelago

VANCOUVER, British Columbia, June 06, 2023 (GLOBE NEWSWIRE) — Teck Resources Limited (TSX: TECK.A and TECK.B, NYSE: TECK) (“Teck”) today announced a CAD$10 million donation to the Chilean Nature Fund (“FNC”) to support Chile’s Protected Marine Areas program and protection of a critical global biodiversity…

Stay up-to-date with the latest news - click here
LATEST NEWSBobcat Company announces investment in Agtonomy to accelerate technology in ag industry
Bobcat Company announces investment in Agtonomy to accelerate technology in ag industry

Investment aligns with Bobcat’s ongoing strategy to empower farmers, specialty growers and others in agribusiness with innovative equipment to accomplish more WEST FARGO, N.D. — Bobcat Company, a global compact equipment, innovation and worksite solutions brand, announced today a strategic investment in Agtonomy , a…

Stay up-to-date with the latest news - click here
LATEST NEWSSEC’s Gensler says crypto ‘built on non-compliance’ with US securities laws
SEC’s Gensler says crypto ‘built on non-compliance’ with US securities laws
Stay up-to-date with the latest news - click here
LATEST NEWSMerck sues federal government, calling plan to negotiate Medicare drug prices ‘extortion’
Merck sues federal government, calling plan to negotiate Medicare drug prices ‘extortion’

Merck is suing the federal government over a plan to negotiate Medicare drug prices, calling the program a sham equivalent to extortion. The drugmaker is seeking to halt the program, which was laid out in the Inflation Reduction Act and is expected to save taxpayers…

Stay up-to-date with the latest news - click here
LATEST NEWSCoinbase sued by SEC for breaking U.S. securities rules as regulator crackdown expands
Coinbase sued by SEC for breaking U.S. securities rules as regulator crackdown expands

Move comes day after SEC sues Binance

Stay up-to-date with the latest news - click here

Leave a Reply