One of the problems with this type of strategy is that volatility in general can and does sometimes rise even when the VIX futures term structure remains upward sloping and in contango. Risks with trading the VIX. There are several ways that you can short the VIX. The “contango” trap; The VIX futures market is said to be in a state of contango – that is, when the current price is lower than the future price. “The VIX term structure…can also be used for constructing trading strategies that attempt to earn the term structure risk premium, when it is in contango. Very basic strategy that goes long on a VIX ETF whenever the futures curve shows signs of backwardation and gets out when it shows signs of contango. Contango and backwardation are two concepts related to futures contracts that need to be understood in VIX trading because VIX ETFs buy or sell some combination of futures contracts. xiv.gains: Numeric vector of gains for XIV. I’m working on similar strategy using XIV. The best investment analysis of the VIX futures market and related exchange traded products. What can be done if the VIX curve is in contango? 3 We will short VXX when VXV has an unusually high premium over VIX. The Basic “Contango Rule” Strategy for VIX and Inverse Volatility. And even if VIX just is a synthetic index, it can be traded through futures, or funds that invest in VIX futures contracts. So there is an obvious opportunity to make some money shorting VXX. The VIX futures term structure details the implied volatility over the next few months. First, let's take a look at the VIX-VXV relationship: The key premise is to: Wait for the market to move from Backwardation to Contango (likely means the panic is over) Buy VXX puts far out in time, usually that means at least 4-5 months for me. contango) The VIX Index, sometimes called the “fear index”, is a market sentiment indicator that measures the market’s expectations of the volatility for the coming 30 days. Real-time analysis of the VIX Futures Curve (VX), the CBOE spot VIX indices (VXST, VIX, VXV, VXMT) and the S&P 500 index (SPX). There are many examples of this since the inception of these volatility ETPs. The trading rules are as follows: Buy (or Cover) VXX if 5-Day Moving Average of VIX/VXV >=1 (i.e. VIX futures tend to rise when the S&P 500 falls -- the correlation of returns is about -0.7. First time in a while contango is benefiting VXX in quite a while. The VX1-VX2 contango of which these ETFs are composed, has averaged 5.4% since 2004 and that has resulted in steady but consistent decline especially in the VXX. Contango means the first contract month is higher than the spot price, and the subsequent months are higher than the front month. Profit From Volatility. T h e second strategy (RY) is based on the contango/backwardation state of the volatility term structure. You can find this curve for example at … VXX and XIV both at times benefit from contango, XIV has been benefiting from contango since sometime in Dec 2011. The iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX) is referred to as "the VXX.". However, backwardation can occur when markets are in crises, as short-term volatility exceeds long-term volatility. When the VIX futures curve is upward sloped (in contango), the VIX is expected to rise because it is low relative to long-term average levels and vice versa for the downward sloped VIX future curve. The best time to buy XIV is when the VIX spikes, but remains below 20. It’s well known that long volatility Exchange Traded Products (ETPs) like VXX, UVXY, and TVIX often experience devastating losses during market quiet spells—even when the value of the VIX is staying relatively stable. This means that the futures market is pricing on average than volatility will rise from current levels. VIX Contango Play includes leveraged volatility ETFs/ETNs and/or corresponding options to benefit from the term structure features in volatility futures. VIX Futures, are most often in Contango. The VIX Divergence strategy aims to take advantage of the relationships between the VIX index and stock indices. Here is a recent working paper making this argument -- note the last sentence of the abstract. XIV sells short the first two front months of the VIX futures contract and VXX buys the first two front months and so both are affected by contango and backwardation. Andrew Nguyen, edit. VXX trading strategy: using VIX contango VXX is a basket of two closest VIX futures contracts. This strategy is also similar to riding the yield curve in bond . Makes no effort whatsoever to avoid getting faked out by monthly futures rollover. This gives the trade plenty of time to work out. Traders can also take the opposite of UVXY, which is the SVXY. But for inverse ETFs, contango can actually help.The VelocityShares Daily Inverse VIX ST ETN (NYSEMKT: XIV) has soared over the past year, largely due … The $VIX futures term structure in contango, the $VVIX Index falls over 8 points to 111 handle & Russell Rhoads breaks down Feb $VIX options trading as the … source If you take a look at its performance, it goes down 99% since opening in 2009. An understanding of VIX technical analysis can mitigate the profit-dampening effect of contango by identifying levels and turning points where funds will lose trend momentum. For example, the first value of xiv.gains should be the XIV gain for the day AFTER the first contango value. This means it is ill-suited to a long-term buy and hold strategy and is instead suited to very short-term bets on price volatility. For this strategy, all you have to do a daily check of the VIX term curve. Today (at the time of this post) I see that we have VIX down around -0.51% XIV down -0.62% and VXX up around +.38%. The Contango Effect. VXV-VIX Contango Ratio Strategy Back. Get VIX and VIX Futures live and historical data, analytics, trade alerts and other research. The obligation of the VXX trading strategy is to match the performance of the S&P 500 VIX Short-Term Futures Index Total Return and it maintains positions in the front two-month Volatility Index (VIX) futures contracts. For instance, if a one-month VIX futures contract is trading at 15, and the VIX is at 12 today, the VIX futures market is in contango. If there were no contango in VIX futures, everyone would buy them to get free insurance against stock market declines. This strategy harvests the so called Contango. In this article, I discuss a strategy for trading VXX. Strategy thesis: VXX experiences most drag when the futures curve is in a steep contango. The term structure of VIX (how the price of future contracts relates to the spot) is normally in contango (upward sloping) meaning that VIX futures have a higher price than the spot. VIX Contango Strategy Because the VIX Index stays mostly at the lower levels, VIX futures are frequently affected by the contango effect. Let's try a simple strategy, go short VXX all the time. Entry to and exit from market are based on proprietary developed timing signal system for optimal risk/reward conditions. Learn how to trade volatility ETPs for profit. vxx.gains This study also describes VIX futures trading above the VIX as contango or an upward sloped VIX futures curve and VIX futures trading below the VIX as backwardation or an inverted VIX futures curve. The futures curve is approximated by the VIX-VXV relationship. In this study, we will create a strategy with the term structure effect of VIX futures and hedge the term structure risk with the S&P500 futures. In addition, traders can also use VIX futures, which measure the future implied volatility of the S&P 500 index, to take advantage of VIX backwardation pricing situations. Contango extremes tend to coincide with VIX and S&P 500 highs/lows (see most recent contango low – dashed green line) Higher contango tends to benefit XIV Timing the tailwind trade. This happened on Sept. 9, when the VIX spiked 40%, but closed below 20. It's when the 1st month M1 VIX future is above the 2nd month M2 VIX future forming a downward sloping curve. This increases the odds of an upside reversal. Should be same length as contango and date-shifted one value to the right. contango: Numeric vector of contango values at the end of each trading day (or week, month, etc.). An investor that simultaneously buys VIX and S&P 500 Index puts for the same expiration month can capture this volatility premium. These heavy losses occur when the VIX futures that underlie these funds are in a price/time arrangement called contango. From 2011 to today the annual performance was more than 70% per year. Using the Ratio between VXV and VIX we can calculate whether UVXY is in backwardation or contango. 3. While futures backwardation and contango can occur in any asset class, they’re most common in commodities such as gold, silver and crude oil. It … The rules of the VIX strategy are explained below: A falling VIX index combined with a falling S&P 500 is a bullish divergence. Knowing that the VIX Index has been primarily in contango, some investors may explore strategies that engage in systematic selling of Mini VIX futures, but investors should be aware of the downside risks of these strategies if there is a quick, big surge in VIX Index and Mini VIX futures values. A rising VIX usually means a falling S&P 500, and vice-versa. backwardation) Sell (or Short) VXX if 5-Day Moving Average of VIX/VXV < 1 (i.e. Surprisingly good at not incinerating money while still providing diversification benefits in a long SPY portfolio. VIX futures backwardation is the opposite of Contango. VIX offers a bird’s eye view of real-time greed and fear, while providing a snapshot of the market’s expectations for volatility in the next 30 days. Like other asset classes, VIX futures in normality is in contango, with a positive gradient as the volatility increases with maturity. Harvesting Contango by investing in inverse volatility This Strategy harvests contango and achieves very high returns investing in inverse volatility. Backwardation generally happens when there is elevated fear and volatility in the market, and has occurred on roughly 17% of trading days since 2004. Trading Strategy for When VIX is in Contango. 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