With the VIX hovering around 12.5, we looked at how various strategies have worked in the past when the VIX was this low.

Idea 1: Buy VIX futures.

Being unable to buy the VIX cash, what is the best alternative? The problems with buying VIX futures are these:

  • They usually trade at a premium to the cash when you are buying and you lose money on the roll yield due to unfavorable VIX term structure.
  • The futures usually trade at a discount to the cash if you sell when the VIX is high.

It would be great if you could buy and sell the VIX cash spot price! Here would have been the results:

 

VIXcastProfit12.5to17.5hold

 

Unfortunately, you have to buy the futures. Here's an example of the futures trade that triggered an entry on 2019-04-12 that exited on 2019-05-07 for a simulated spot profit of $885.98.

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On 4/12/2019, even though the cash was 12.08, the June future was 16.12 (we calculate an implied future for each expiration), July future was 16.12, Aug 16.39 and Sep 16.67. On the exit date of 5/7/19, with the VIX cash at 20.94, the futures were in 'backwardation' where they were below spot, with the June at 18.42, July 18.25, Aug 18.02 and Sep 18.06. Simulating the entry and exit for each of the futures the best return was the June at 18%, July 13%, Aug 10% and Sep 8% even though the cash was up 73%!

Let's look at some other alternative strategies.

Idea 2: Buy VIX Calls

Buy VIX Calls if the VIX goes under 12.5. 30 days to expiration (DTE) 30 delta calls held to expiration does poorly with a -13.07% Annual Return. Our annual returns are based on profit/stock price, slippage and commissions are considered as explained here.

Idea 3: Buy SPY OTM Puts

Buy SPY OTM puts if the VIX goes under 12.5. I chose a long term 1-year put with a low delta of .05 returned a -0.04% annualized return.

Idea 4: Buy SPY Calls

Buy SPY cheap calls and delta hedge. I backtested buying 6-month OTM 0.05 delta calls, delta hedging every 5 days when the VIX was under 12.5 and exit the position when the VIX went above 17.5. This returned -0.03% annually.

Idea 5: Buy a SPY 1x2 put backspread

Buy a SPY 1x2 put backspread. I used a short 0.40 delta put and two long 0.20 delta puts at 45 days to expiration in the backtest, and entered the spread when the VIX was under 12.5 and held the position to expiration. The strategy returned -0.6%.

Idea 7: Buy a SPY straddle

Buy a SPY straddle when the VIX falls below 12.5. We tested the 30 DTE hold to expiration which returned 0.27%.

Idea 8: Buy UVXY

Buy UVXY when the VIX goes below 12.5 and exit when the VIX goes above 17.5 returned -4.01%.

Idea 9: Buy SPY

Buying the SPY outright when the VIX falls below 12.5 and exit when the VIX goes above 17.5 returns 1.84%.

Summary

Out of these nine ideas, the VIX futures has the best returns, but trading those can be tricky.

 

More reading - https://blog.orats.com/vix-level-trigger-in-backtesting

https://blog.orats.com/2018/07/18/technical-analysis-using-options-data

Try these with a free-trial.

 

 

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