2013 Performance Report - Part 2

In my previous post I covered the year-end performance of the "WRY-10SMA" strategy, which is designed for the more active trader, typically requiring roughly 2-3 dozen trades per year. Today I'll go over the performance of our "Bias" strategies for both VXX and ZIV, as given by our Daily Forecasts.

1) ZIV Bias
We start with ZIV, which couldn't be any more straight forward. Our forecasted Bias for ZIV has been positive since Nov 21, 2011, which was the buy signal.

ZIV performance in 2013: +63% 

2) VXX Bias
The VXX Bias is a bit more dynamic than ZIV Bias, but is still designed for investors who prefer to make trades less frequently. Because some traders prefer to only invest in inverse volatility (XIV) while staying away from long volatility (VXX), I will once again evaluate the performance of this strategy as two halves: the "Negative VXX Bias" in which you short VXX (or buy XIV), and the "Positive VXX Bias" in which you buy VXX.

2a) Negative VXX Bias
The biggest advantage of using the Negative VXX Bias strategy is that it allows traders to take advantage of the bias in XIV when it is available and keeps you out of the trade when the bias is against you. This is most clearly illustrated in the performance going back to 2009 (2009-2013 performance data located here).

Cumulative Return Jan 30, 2009 - Dec 31, 2013
XIV: +1,636%
"Negative VXX Bias": +2,383%

*Note: Results assume that gains are reinvested; prior to inception of XIV the inverse daily return of VXX is used to calculate the daily closing price of XIV.

While this strategy is prone to larger drawdowns than the "WRY<10SMA" strategy, the long term results have made it worthwhile (WRY<10SMA returned 1870% over this same 5 year timeframe).

However, in 2013 the Negative VXX Bias strategy had less remarkable results. "Taper talk" and Congressional games of debt ceiling chicken took our Bias readings briefly to the edge of the positive side and gave the signal to close out positions at rather unfortunate times. Results below (2013 performance data available here).

Cumulative Return Jan 1, 2013 - Dec 31, 2013

XIV: +107% 

"Negative VXX Bias": +53%

"Negative VXX Bias" Trade Summary, 2013

• # of Gains: 5
• # of Losses: 2
• Avg Return: +7.3%
• Max Gain: +24.2%
• Max Loss: -21.2%

Trade histogram of gains & losses for "Negative VXX Bias" in 2013:

2b) Positive VXX Bias

We saw a handful of trades for the "Positive VXX Bias" strategy in 2013, however as mentioned in the previous section, these trades were brief and reversed quickly. You can probably see why many traders choose to just avoid buying VXX. 

Cumulative Return Jan 1, 2013 - Dec 31, 2013

XIV: +107% 

"Positive VXX Bias": -30%

"Positive VXX Bias" Trade Summary, 2013

• # of Gains: 0
• # of Losses: 6
• Avg Return: -9.2%
• Max Gain: -2.5%
• Max Loss: -20.3%

Trade histogram of gains & losses for "Positive VXX Bias" in 2013:

That wraps up the 2013 performance review. If you have any questions or comments feel free to comment below or talk to us directly via the Contact page. 


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Hypothetical and Simulated Performance Disclaimer
The results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for XIV, VXX, and ZIV as an approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.

2013 Performance Recap - Part 1

Now that 2013 has drawn to a close it's time for a performance recap of the Trading Volatility trading strategies. I'll be covering performance in two posts:

1) "WRY - 10SMA" Strategy
2) "Bias" Strategy for VXX & ZIV

1) "WRY - 10SMA" Strategy
Last month I introduced a strategy to enter and exit trades based on whether the Weekly Roll Yield (WRY) for VXX is above or below its 10-day moving average. It uses the chart from the VIX Futures Data page, shown below, to buy XIV (the inverse of VXX) when the WRY is less than its 10SMA (blue line is below the thin purple line), and buy VXX when the WRY is greater than its 10SMA (blue line is above the thin purple line).

1A) First, let's look at the performance of the "WRY < 10SMA" trade back to the inception of VXX in 2009 (data available here).

Cumulative Return Jan 30, 2009 - Dec 31, 2013

XIV: +1,691% 

"WRY < 10SMA": +1,870%

*Note: Results assume that gains are reinvested; prior to inception of XIV the inverse daily return of VXX is used to calculate the daily closing price of XIV. 

Focusing now on performance in 2013, you can see from the chart below that the "WRY < 10SMA" strategy under-performed a bit in a choppy market. One of the benefits of this strategy is that it helps to reduce drawdowns experienced by XIV and protect the portfolio in case the market sees a larger selloff, but it can come at the cost of missing out on "rebound gains" in an event-driven market. Hypothetical performance data available here.

  

Cumulative Return Jan 1, 2013 - Dec 31, 2013

XIV: +107% 

"WRY < 10SMA": +86%

"WRY < 10SMA" Trade Summary, 2013

• # of Gains: 11
• # of Losses: 10
• Avg Return: +3.4%
• Max Gain: +27.3%
• Max Loss: -6.5%

Trade histogram of gains & losses for "WRY < 10SMA" in 2013:

1B) Next is the other half of the strategy, "WRY > 10SMA", in which VXX would be bought. As noted in my introductory post on this strategy, the gains obtained using this strategy in the early part of the trade are almost always gone by the time the WRY crosses back below the 10SMA. Because of this it makes sense to close trades early or skip this half of the trade altogether (hypothetical performance data available here).

"WRY > 10SMA" Trade Summary, 2013

• # of Gains: 6
• # of Losses: 13
• Avg Return: -2.2%
• Max Gain: +7.9%
• Max Loss: -11.5%

Trade histogram of gains & losses for "WRY > 10SMA" in 2013:

In my next post I'll cover the performance of the "Bias" strategies (from our Daily Forecasts) for both VXX and ZIV .


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Hypothetical and Simulated Performance Disclaimer
The results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for XIV, VXX, and ZIV as an approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.

2014 VIX Futures Expiration Days And Roll Period Lengths

As we head into 2014 I wanted to share the expiration dates for VIX futures in each month as well as the number of days in each roll period. Table below (source: CBOE Expiration Calendar).

Expiration Date           Roll Period Length

- Ending January 22:          22 days

- Ending February 19:        19 days

- Ending March 18*:          19 days

- Ending April 16:              21 days

- Ending May 21:              24 days

- Ending June 18:              19 days

- Ending July 16:               19 days

- Ending August 20:           25 days

- Ending September 17:     19 days

- Ending October 22:         25 days

- Ending November 19:      20 days

- Ending December 17:      19 days

*March expiration occurs on a Tuesday

Volatility Trading Made Simple And Profitable

[Updated on 12/11/13 at 4:48pm PT]

Last week we added a new chart to the VIX Futures Data page which plots the daily closing value of the VXX Weekly Roll Yield, WRY, against its 10-day simple moving average.

This new chart provides traders with simple entry and exit signals that can be used to measure the momentum of VXX, UVXY, XIV, and SVXY.

There are two "halves" of this trading strategy:
1) being short VXX/UVXY (or long XIV/SVXY) whenever the WRY is below its moving average, and
2) being long VXX/UVXY (or short XIV) whenever the WRY is above its moving average.

Below is the current chart.

I've backtested the strategies separately for "short VXX only" and "long VXX only" from the inception of VXX (1/30/2009) through 12/10/2013. Decision points are made using the day's closing data (individual trades in the analysis can be viewed here).

For short VXX only:

• # of Gains: 59
• # of Losses: 47
• Avg Return: +4.1%
• Max Gain: +40.4%
• Max Loss: -19.2%
• Sum of Gains & Losses: +438.6%

For long VXX only:

• # of Gains: 32
• # of Losses: 74
• Avg Return: -0.8%
• Max Gain: +60.6%
• Max Loss: -17.4%
• Sum of Gains & Losses: -81.9%

---> Sum of all gains and losses: +356.7%

Below are the histograms for each of the strategies, grouping the number of trades that occurred in various blocks of percentage points.

The biggest block of returns for trades using the short VXX strategy is between -4% and 0%, which had 27 occurrences.

The biggest block of returns using the long VXX strategy is also between -4% and 0, which had 37 occurrences. Most of these trades experience gains in the first couple days but end up in a loss as VIX futures revert back to their mean.  

The Weekly Roll Yield chart is available to all Trading Volatility members. For more information on subscriptions see our subscribe page.

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Hypothetical and Simulated Performance Disclaimer
The results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for XIV, VXX, and ZIV as an approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.

Watching For The Return Of Volatility

Hello and welcome back! I hope everyone had a great Thanksgiving break.

Today I wanted to provide a brief look back on volatility over the past several weeks and provide my thoughts on what it means going forward. Ever since the debt ceiling deadlock concluded in October, VIX has remained in a fairly tight range between 12 and 14. Meanwhile, the S&P 500 has notched eight straight weeks of gains.

In this post I'll be covering:

• Technical Review
• Forecast Review
• Nov 15 VIX Reversal
• Elevated SKEW
• Trading Plan (Member Access Only)

Technical Review
Taking a look at the chart of implied volatility vs actual volatility (from the VIX Futures Data page), we can see that the current VIX range is roughly the same as what we saw in the July/August timeframe (orange highlight), which at the time, bounced along the floor set by HV60 (actual volatility over the last 60 trading days). Actual volatility in the S&P 500 has continued to decline since then and the HV60 floor is now two points lower, hitting 10.28 on Friday. This premium in VIX to HV60 tells us that options sellers are not yet convinced that the low volatility environment we are currently experiencing will continue into 2014.

The VIX futures term structure shows us a pretty consistent contango since mid October, with nearer months cheaper than the more distant months. Overall the movement has been mostly sideways with a slight decline across all months, while the front months futures have fallen more rapidly toward spot VIX.

Forecast Review
Looking at our forecast charts we can see that the Bias (left axis) has remained mostly negative for VXX and positive for ZIV. During this past 6 months VXX has declined from $80 to $45 (-43%), while VXX inverses (XIV and SVXY) have each gained 45%. Meanwhile, ZIV has increased 18%, moving from $30 to $35.80.

Taking a look at the VXX Spike Risk forecast we can really get a feel for how sleepy the volatility market has been lately with only a couple days above the 30% risk mark over the past 6 weeks.

Nov 15 VIX Reversal
On Nov 20th I posted in our Members' Forum about a possible reversal in the VIX daily chart that occurred on Nov 15th. While it is still possible to break lower, this remains something for VIX traders to watch in the coming weeks, especially as we press up against the 200 day moving average at 14.37 (red dashed line).

Elevated SKEW
The CBOE SKEW index has been elevated near 130 for a few weeks now (weekly chart below) and is at its highest levels since March 2012. This value tells us that the options market views a higher probability of returns that are two or more standard deviations below the mean over the next 30 days, which represents a 15%+ decline in the S&P 500. Given the recent run-up in stocks an expectation of a pullback isn't too surprising, but is something to be prepared for nonetheless.

Trading Plan (Member Access Only)
Please login to the Members' Forum to finish reading this article. If you're not yet a member you can join via the Subscribe page.