Daily Commentary - Posted on Friday, December 19, 2014, 7:21 PM GMT +1


Dec Friday 19

Trading (Mid-Term) Volatility – Periods Of Low Historical Volatility

A couple of weeks ago I started a series of postings, all dealing with trading volatility ETNs / ETFs like XIV® (VelocityShares Daily Inverse VIX Short-Term ETN) and VXX (iPath® S&P 500 VIX Short-Term Futures™ ETN) and respective trading strategies. One of those strategies was DDN’s VRP Strategy (Double-Digit Numerics , Volatility Risk Premium) due to its exceptional performance – at least until December 2012 – and its compelling approach (from the paper Easy Volatility Investing from Double-Digit Numerics).

This posting is about trading the ZIV® (VelocityShares Daily Inverse VIX Medium-Term ETN) – linked to the inverse of the daily performance of the S&P 500 VIX Mid Term Futures™ Index ER, and VZZ® (iPath Long Enhanced S&P 500 VIX Mid-Term Futures ETN) – linked to a leveraged return on the performance of the S&P 500 VIX Mid-Term Futures™ Index TR – , offering exposure to a daily rolling short|long position in the 4th, 5th, 6th and 7th month VIX® futures contracts.

At the same time, I’d like to address a problem which specifically applies to the Volatility Risk Premium Strategy (but probably not limited to): Periods of relatively low historical volatility, while implied volatility ( VIX® and the respective front and second month futures (Ticker: VX1|VX2) ) either spikes up or at least (steadily) rises to a (significantly) higher level (investor fear). Due to the fact that during those periods implied volatility continuously (significantly) exceeds historical (realized) volatility, the strategy keeps holding onto a losing position ( XIV® or ZIV® ) instead of buying into the momentum ( VXX® or VZZ® ).

But first of all the customized Volatility Risk Premium (VRP) Strategy rules (always market on close):

  • Long ZIV: x-day moving average of [VX1|VX2 (30-day const. maturity) – 2-day historical volatility of S&P 500 * 100] ≥ 1
  • Long VXZ: x-day moving average of [VX1|VX2 (30-day const. maturity) – 2-day historical volatility of S&P 500 * 100] < 1
  • Hold until a change in position.

Please note: Ticker: VX1|VX2 represent the VIX® front and second month futures, merged into a continual time series as a 30-day constant-maturity futures price (the basis for VXX® and XIV®).

Image I shows the respective equity curves: the VRP (customized) Strategy (black line), and – for exemplary purposes (with hindsight!) – in order to demonstrate the problem mentioned above and a possible solution at the same time – a tuned copy of the VRP (customized) Strategy (blue line), where during periods of relatively low historical but rising (rocketing) implied volatility (highlighted by yellow boxes) historical volatility has been leveraged by a factor of 10 (finally in order to trigger a buy VXZ® more often).

The respective periods are (in excerpts, for exemplary purposes):

# from to
1 4/3/2006 6/30/2006
2 4/2/2007 12/31/2007
3 4/15/2010 5/19/2010
4 2/15/2011 3/16/2011
5 8/15/2011 10/3/2011
6 5/10/2013 6/20/2013
7 7/23/2014 9/30/2014
8 12/5/2014 12/15/2014


Image I – Total Equity Curve(s)
(03/25/2004 – present)

It is clearly recognisable that while the basis strategy (not leveraged) shows a poor performance during those periods of low historical / rocketing implied volatility (due to holding onto a losing position in ZIV® way too long until finally historical volatility keeps pace up with implied volatility, especially during time frame 2), the tuned (leveraged) strategy switches from short to long volatility at the proper time.

Image II shows time, duration and severity of respective drawdowns (including the tuned (leveraged) strategy’s advantage/disadvantage compared to the basis strategy (yellow areas).

Image II – Drawdown Curve(s)
(03/25/2004 – present)

Image III shows the respective statistics. Please keep in mind that the tuned (leveraged) strategy is trading with hindsight in order to demonstrate the problem described above which specifically applies to the Volatility Risk Premium Strategy (but probably not limited to).

Image III – Summary Statistics
(03/25/2004 – 10/15/2014)

Possible solutions to fix the problem concerning (relatively) low historical volatility / rising (rocketing) implied volatility when / as long as apropriate (this time without hindsight):

  • leveraging the respective historical volatility,
  • increasing the cut-off (increasing the ‘1’) – triggering “long volatility” more frequently,
  • shortening the x-day moving average (in order to get the system to react more quickly),

to be continued … (means more on this to come, stay tuned)


Have a profitable week,


Disclosure: I’am long/short XIV, and long/short VIX, RVX and EURO STOXX 50 volatility futures.


Remarks: Due to their conceptual scope – and if not explicitly stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets). Index data (e.g. S&P 500 cash index) does not account for dividend and cash payments.



The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

(Data courtesy of MetaStock and Pinnacle Data Corp., and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

Comments (30)


  1. Alex says:

    How to detect that we are in such a period at a given date?

  2. […] Trading (Mid-Term) Volatility – Periods Of Low Historical Volatility [Trading the Odds] A couple of weeks ago I started a series of postings, all dealing with trading volatility ETNs / ETFs like XIV® (VelocityShares Daily Inverse VIX Short-Term ETN) and VXX (iPath® S&P 500 VIX Short-Term Futures™… […]

  3. Konstantinos says:

    very interesting research as usual,but maybe the XIV B&H in the statistics table is ZIV?

  4. Konstantinos says:

    I can not wait to see the XIV/VXX trading model with leveraging the respective historical volatility.Does it have such smaller MDD like the above?

  5. solo says:

    These are great suggestions. I’ve found that by using a simple indicator with Canadian volatility ETFs a $10k start in mid-2012 would now be at $5mil! I’m sure this method would also work with US ETFs.

    • Konstantinos says:

      Solo, which simple indicator helped your Canadian vol etf trading?

    • Alex says:

      What’s the indicator? And ETFs?

    • sutluc says:

      10K to 5M from mid 2012 till now trading vol etfs? No, not possible, no way.
      I’d be surprised if the total movement would get you that result even if you caught every top and every bottom perfectly.

      You could end up with a result like that if you had shorted HVU mid 2012 and held it through all it’s reverse splits. but that is a purely hypothetical exercise, not doable in practice.

    • John says:

      Unfortunately, for Solo, this “comment” is not consistent with the “comment” he left just 15 days prior. See what he wrote at the end of the article titled, “DDN VRP Strategy Revised (2)” on this same website.

      His conflicting performance results completely undermine his credibility.

  6. Dorky says:

    How would the performance be like if you include a 2% cost per round trip as commission, slippage, spread? I personally estimated it to be around 24% annual return (leveraged) if such cost is included per trade. But what about you?

  7. Alex says:


    Have you tried to adjust the VRP strategy with XIV seasonalities you described in previous posts? Or to build a system based on the seasonalities only?


  8. Ovidiu says:

    Hi Frank,

    Which is the liquidation risk for XIV if the volatility would spike over 100%, like during the 2010 May Flash crash.

    Or 1 to 10 August 2011 ?

    If this would happen today, the value of XIV would become 0, or it would be liquidated close to 0, is that correct ?

    Thank you for your work and may your hopes for 2015 become reality,

  9. sutluc says:

    I see you are out of VXX now. I believe the original VRP strategy would still hold the VXX position.

  10. Ulpiano says:

    If I am correct, the “opposite” of ZIV is no longer VZZ (nor VZZB), but VXZ. May you confirm?

    • TradingTheOdds says:

      Yes and no. VZZ has never been the “opposite” of ZIV. The “opposite” of XIV is VXX, and the “opposite” of ZIV (Velocity Inverse VIX Medium-Term ETN) is – and has ever been – VXZ (iPath S&P 500 VIX Mid-Term Futures ETN).

      VZZ is the iPath Long Enhanced 2x S&P 500 VIX Mid-Term Futures ETN (2x leveraged). “VZZ” in my posting is a typo (corrected in my posting, but not in the respective images).

  11. James says:

    Hi Frank,
    I have a question on how you deal with the closing times of VIX, VXMT, VIX futures. The volatility indices and futures all have a closing price at 3:15 PM, while the VXX and XIV have closing prices at 3:00 PM. So backtested results are based on 3:15 PM volatility pricing while actual trades are based at 3:00 PM pricing, possibly resulting in erroneous trades. I’ve had this problem a few times with my VXX/XIV trading. Have you found a way to deal with this or do you just assume this error is negligible. Thanks for all you work.


    • TradingTheOdds says:


      from my perspective a) VIX regularly doesn’t move very much in the time frame between 3:00 PM and 3:15 PM, and b) in the long run any movements (up and downs) will balance out.

      I don’t know any source with 3:00 PM VIX closing prices (e.g. CBOE shows 3:15 PM closing prices).


  12. mark says:

    Hi Frank. I was checking the value of historical volatility and VIX during the periods you highlighted vs the balance of periods.
    Unless I am missing something they seem pretty aligned:

    – historical volatility (2d): 13.9% vs 13.5% in balance
    – vix: 19.3% vs 19.7% in balance

    You described the periods highlighted as those with relatively low historical volatility and VIX spikes…

    Thanks for clarifying

  13. Wui says:

    Hi Frank,

    In this strategy, are you really leveraging S&P 500 HV by a factor of 10? That seems off to me, as that term would just dominate the VRP calculation, resulting in a strategy which is always long volatility/VXZ.

    Thanks for the clarification.

    • TradingTheOdds says:


      yes, but only during periods of relatively low historical but rising (rocketing) implied volatility (see table in the respective posting) in order to leave the formula unchanged.


  14. OliverT says:

    Have you considered UVXY?

  15. Chandy says:


    How is “[VX1|VX2 (30-day const. maturity)” calculated?

    Is it a weighted average of first month VIX futures and second month VIX futures depending on number of days till expiration of first month?


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