USING THE VIX/VIX3M RATIO AS A SIGNAL IN AN XIV TRADING STRATEGY

January 14, 2018

This post is a test of an XIV trading strategy that uses the VIX/VIX3M ratio as a buy and a sell signal. The strategy buys into XIV if the VIX/VIX3M ratio is below the [50 day simple moving average * 1.05]. It sells XIV if the VIX/VIX3M ratio moves above the [50 day simple moving average * 1.1].



The VIX measures the market’s expectation of 30-day volatility, whereas the VIX3M (previously known as VXV) measures the market’s expectation of 93-day volatility (3 months). XIV tends to perform better when the VIX/VIX3M ratio is below 1.



The results of this strategy from 11/30/2010 - 12/18/2017 are as follows:

As you can see, the signal boosts returns and reduces the maximum drawdown number; however, using the signal alone is not very effective. The risk metrics are still not strong enough to trade this as a live strategy.

All in all, the strategy is not impressive or anything we could recommend as investable. The VIX/VIX3M ratio is useful in helping to identify certain trends in volatility, but the signal alone is not adequate. Using the ratio along with other buy and sell indicators could prove to be promising.



The key to finding a quality volatility strategy is identifying strong risk-adjusted metrics (UPI, Sharpe, etc.). For these metrics to impress, the strategy must have high annualized returns while minimizing drawdowns as much as possible. Our Volatility Strategy is a good example of a quality XIV trading strategy. Below is the comparison of the VIX/VIX3M strategy and our Volatility Strategy.

If you have any questions or would like us to test out other strategies, feel free to email us.