Playing the Short Side on SPX
So after the last two weeks of heavy swings and poor trade timings/decisions, I’ve decided to go back and revisit some of my models. It appears that capping your gains at 5% is not exactly an optimal strategy and that just letting the F1/F2 ratio dictate your entry and exit would make you better off. As well, I’m scrutinizing the usage of only VXX as the primary instrument for shorting volatility. It appears that VXZ actually performs better in certain climates, although VXX would perform better overall from 2009, but 2012 is an anomaly of a year for shorting volatility. I’ve chosen to run backtests for two time-frames, 2013 to 2015 and 2016 FYTD for both VXX and VXZ shorting. My finds are below:
Shorting VXX
01/01/2013 to 12/31/2015
01/01/2016 to 09/16/2016
Shorting VXZ
01/01/2013 to 12/31/2015
01/01/2016 to 09/16/2016
From the above, you can clearly see that for the rocky volatility climate in 2013 to 2015, VXZ was clearly the better performer to short while VXX beat out VXZ in 2016. However, in both time periods, VXZ generally has a lower drawdown and less volatility in returns due to its construction of using the later expiry futures. With this in mind, I believe that to take advantage of both cases, I’d short both VXX and VXZ simultaneously and in equal weights. The results are actually what you would expect in that returns are lower for both time windows, but drawdowns and volatility are in the middle, which makes this actually a more attractive strategy.
Short 50% VXX and 50% VXZ
01/01/2013 to 12/31/2015
01/01/2016 to 09/16/2016
With these findings, I’ve actually scripted up a live trading algorithm in Quantopian now and will be paper trading it in Interactive Brokers to see how it looks. Eventually, I’m going to just hook that algorithm up to my real account and just let it trade itself. I will be keeping updates on the live algorithm posted here.
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