# Volatility Strategy

17 Nov 2014To install Systematic Investor Toolbox (SIT) please visit About page.

Volatility Risk Premium (VRP)

A quick test of the results presented at:

- DDNs Volatility Risk Premium Strategy Revisited (2)
- Volatility Risk Premium Trading Volatility (Part I)
- Volatility Risk Premium: Sharpe 2+, Return to Drawdown 3+
- Chasing the Volatility Risk Premium
- Easy Volatility Investing by Tony Cooper at Double-Digit Numerics
- MarketSci VIX & Volatility
- How Does the CBOEs VIX Index Work?
- Reconstructing VXX from CBOE futures data > Do you have equivalent code to recreate historical VXZ data? > Just read the VXZ brochure and adjust the calculation accordingly

How to calculate the VXX price and how does backwardation and contango influence it

## Paid Data:

## Strtegies:

A Failed Attempt at Backtesting Structural Arbitrage Trading VXX with nearest neighbors prediction

Helmuth Vollmeier You can download a “long” XIV and “long” VXX back to the start of VIX futures 2004 from my Dropbox which is updated daily with CSI data via a small R-script. VXX: https://dl.dropboxusercontent.com/s/950x55x7jtm9x2q/VXXlong.TXT XIV: https://dl.dropboxusercontent.com/s/jk6der1s5lxtcfy/XIVlong.TXT

Ilya , Samuel update: ZIV & VXZ, reconstructed according to the method outlined in their prospectus VXZ: https://www.dropbox.com/s/y3cg6d3vwtkwtqx/VXZlong.TXT ZIV: https://www.dropbox.com/s/jk3ortdyru4sg4n/ZIVlong.TXT

Frank says:The rationale behind is very easy: Sell (volatiity) risk when there is fear in the market: (implied volatility overestimates realized volatility), and vice versa. Even the most simple strategy based on that concept: Go long XIV at todays close if the VIX index will close below the front month VIX futures contract, or go long VXX if it will close above. Hold until a change in position. came up with 50+% annualized returns over the course of the last 10 years (including the financial crisis and the most recent bull market). See http://volatilitymadesimple.com/backtest-comparing-the-vix-index-to-front-month-vix-futures/

Instruments:

- VIX - CBOE Volatility Index
- XIV (inverse volatility)(inverse 1-month VIX) - VelocityShares Daily Inverse VIX Short-Term ETN
- VXX (long volatility)(long 1-month VIX) - iPath S&P 500 VIX Short-Term Futures
- VXZ - iPath S&P 500 VIX Mid-Term Futures

Strategy rules:

- At the close, calculate the following:
- the 5-day average of the [VIX index (10 day historical volatility of SPY * 100)]. Note that historical volatility is based on the natural log of each days % change.

- Go long XIV at the close when the result of the above formula is greater than 0, otherwise go long VXX. Hold until a change in position

Based on Reconstructing VXX from CBOE futures data ,
I was able to reconstruct VXX from CBOE futures. I made a helper function `reconstruct.VXX.CBOE`

to show steps needed to reconstruct VXX.
I also made another helper function, `cboe.volatility.term.structure.SPX`

, to download an plot VIX Term Structure.

For comparison I used historical VXX data from Free Historical VXX Data >1) From the raw VX contract data, there are 33 Month-2 data values that have missing values, How did you fill those values? I filled them by using the same Month-2 to Month-1 ratio as the first subsequent non-missing value.

I just put NA’s

Next let’s load historical data

Start | |
---|---|

VXX.LONG | 2004-03-26 |

VXX | 2009-01-30 |

VXX.CBOE | 2004-03-26 |

VXX.HIST | 2004-03-26 |

VXX | VXX.CBOE | VXX.HIST | VXX.LONG | |
---|---|---|---|---|

VXX | 98% | 100% | 100% | |

VXX.CBOE | 98% | 98% | ||

VXX.HIST | 100% | |||

Mean | -77.4% | -74.6% | -77.4% | -77.4% |

StDev | 62.1% | 66.3% | 62.1% | 62.1% |

VXX.HIST | VXX.CBOE | VXX.LONG | |
---|---|---|---|

VXX.HIST | 98% | 100% | |

VXX.CBOE | 98% | ||

Mean | -40.6% | -38.2% | -40.3% |

StDev | 55.7% | 57.3% | 55.2% |

VXX | VXX.CBOE | VXX.LONG | |
---|---|---|---|

VXX | 96% | 100% | |

VXX.CBOE | 96% | ||

Mean | -76.3% | -72.7% | -76.3% |

StDev | 59.7% | 65.4% | 59.7% |

VXX | VXX.CBOE | |
---|---|---|

VXX | 96% | |

Mean | -76.3% | -72.7% |

StDev | 59.7% | 65.4% |

So we can use following `VXX + VXX.LONG`

to extend VXX in `getSymbols.extra`

Start | |
---|---|

VXZ.LONG | 2004-03-26 |

VXZ | 2009-02-20 |

VXZ.CBOE | 2004-03-26 |

VXZ | VXZ.CBOE | VXZ.LONG | |
---|---|---|---|

VXZ | 94% | 100% | |

VXZ.CBOE | 94% | ||

Mean | -33.0% | -32.5% | -33.0% |

StDev | 29.9% | 30.8% | 29.9% |

VXZ.CBOE | VXZ.LONG | |
---|---|---|

VXZ.CBOE | 88% | |

Mean | -7.3% | -14.2% |

StDev | 27.3% | 29.1% |

So we can use following `VXZ + VXZ.LONG`

to extend VXZ in `getSymbols.extra`

Finally let’s plot VIX Term Structure.

trade.date | expiration.date | vix | contract.month |
---|---|---|---|

2014-12-05 15:14:57 | 2014-12-20 | 11.81 | 1 |

2014-12-05 15:14:57 | 2015-01-17 | 12.91 | 2 |

2014-12-05 15:14:57 | 2015-02-20 | 14.50 | 3 |

2014-12-05 15:14:57 | 2015-03-20 | 16.08 | 4 |

2014-12-05 15:14:57 | 2015-06-19 | 17.63 | 5 |

2014-12-05 15:14:57 | 2015-09-18 | 18.50 | 6 |

2014-12-05 15:14:57 | 2015-12-19 | 19.34 | 7 |

2014-12-05 15:14:57 | 2016-01-15 | 19.12 | 8 |

2014-12-05 15:14:57 | 2016-06-17 | 20.16 | 9 |

2014-12-05 15:14:57 | 2016-12-16 | 21.47 | 10 |

*(this report was produced on: 2014-12-07)*