$\begingroup$ You have to linearly interpolate between two futures, one with maturity less than a month (the nearby VIX future) and one with maturity greater than a month (the second nearby). The volati lity of the options closest to maturity is interpolated with that of the options farthest from maturity to arrive at a constant 30 day indication of expected volatility in S&P/ASX 200. To build out our volatility blends we first solve for the at-the-money volatility of each expiration to capture the term-structure of the volatility. DISCLAIMER: PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS AND ALL INVESTMENTS INVOLVE RISK. Graph and download economic data for from 1962-01-02 to 2021-01-15 about VIX, volatility, stock market, USA, 10-year, maturity, Treasury, interest rate, interest, and rate. Last updated Nov 2015 *. In graph #3 and 4 we see that, despite the strategy’s lack of connection to the overall level of VIX futures (i.e. This is completely unrelated to our own strategy’s signal; it just serves to add a little color to the daily report and allows subscribers to see what other quantitative strategies are saying about the market. It represents expectations as much as a full month in the future when it initially becomes the front contract, but this incrementally decreases to zero days as the front month contract itself marches towards expiration. What VIX Term Structure Is. The scatterplots below illustrate a similar effect where, following Chrilly Donninger, we have plotted VX returns over a day, a week, and month (from a constant maturity VX futures index) against the model-free implied volatility term structure slope. We compute the returns for constant maturity VIX futures returns following Eraker and Wu(2017)as rVF T,t+1 = w t F t+1(T 1) F t(T 1) + (1 −w t) F t+1(T 2) F t(T 2) −1, (1) In this variation we look at comparing the VIX index to the 1-month constant maturity price of VIX futures. The constant-maturity, floating-strike implied volatilities are then calculated by interpolation. chart #2, 30-day constant maturity), it has been successful capturing the VRP that exists between the front month and spot VIX (graph #3) and between the second, front, and spot VIX … Let’s check in on how using this 30-day constant maturity indicator has performed in the last 3 years: This is another common indicator and a very useful one. If you would like an introduction, please read my answer to How does the VIX index and its related futures contracts work? VIX Term Structure is the term used by CBOE for a set of calculated expected S&P500 Index volatilities based on S&P500 options of different time to maturity.The methodology of the calculation is the same as that used for VIX Index itself. NONE OF THE INFORMATION ON THIS SITE IS GUARANTEED TO BE CORRECT, AND ANYTHING WRITTEN HERE SHOULD BE SUBJECT TO INDEPENDENT VERIFICATION. Yields are interpolated by the United States Treasury from the daily yield curve. Strategy results trading XIV (inverse volatility) and VXX (long volatility) are in blue, compared to buying and holding XIV in grey, from mid-2004 to present: By 1-month “constant maturity” price I’m referring to the mix of first and second month VIX futures contracts that achieves a 1-month weighted average maturity. - As the days roll forward, it's using slightly less of the front month M1 and slightly more of the back month M2. Capturing the constant maturity volatilities helps traders visualize and track the behavior of volatility over time providing context to current market implied volatility. So over time, the ETP buys a high priced futures contract on the VIX, and then later sells it to purchase another maturity. Documents about VIX ETFs explain this calculation in detail with examples. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE RESULTS SIMILAR TO THOSE SHOWN. The SPVXSTR tracks the performance of a position in the nearest and second-nearest maturing VIX futures contracts, which is rebalanced daily to create a nearly constant 1-month maturity. If the VIX Index is below the 30-day constant maturity, this means the futures price will tend to fall as it converges towards the spot VIX and provides a tail wind for XIV. Traders often use this simple approach to judge whether the VIX futures term-structure is in contango (favoring XIV) or backwardation (favoring VXX). As shown in Figure 14.4, VXX tends to perform poorly when it is paying the VRP while the VIX futures curve is upward-sloping ( in con- tango using futures parlance) and tends to perform best when it is receiving VRP while the curve is downward-sloping ( in backwardation ). Click to see Volatility Made Simple’s own elegant solution to the VIX ETP puzzle. Selecting the options to be used in the VIX Index calculation My answer assumes prior knowledge of the basic workings of the VIX index and futures contracts. A 30-day constant maturity just means that we are averaging out the number of days on these contracts to represent how much weighting the volatility ETP has towards each futures contract so that it's a constant 30-day rolling contract converging down to 0 days and the spot/cash VIX index. Now that interest rates have declined near the zero-level, and unless long term interest rates move into significantly negative territory, investors can hardly expect to achieve such terrific returns from long-term treasury bonds over the next forty years. VelocityShares Daily Inverse VIX Short-Term ETN offers inverse one-month constant-maturity exposure to VIX futures. 1. rolls continuously throughout the month to maintain a constant maturity and adjusts its holdings of VIX futures to maintain a constant vega exposure. VIX central is a very useful website that not only gives the VIX futures delayed quotes, but also shows the term structure—a graph of the VIX Futures for the various expiration dates vs time. 1 month time to maturity, UX2 for 2 months and so on. To learn more about this please check out my dedicated article called VIX futures term structure explained. When I need to model a traded VIX-futures, then I map it to the generic ones (this mapping changes as the futures approaches maturity) and use the returns of the generic futures in the historical simulation. Cboe has granted S&P Dow Jones Indices a license to use the VIX methodology to create the S&P 500 VIX Futures Index. We ﬁnd the majority of the trading volume in VIX futures coming from mid-longer maturity contracts. If the VIX Index is above the 30-day constant maturity, this means the futures price will tend to rise as it converges towards the spot VIX and provides a tail wind for VXZ rolls continuously throughout the month to maintain a constant maturity and adjusts its holdings of VIX futures to maintain a constant vega exposure. GitHub Gist: instantly share code, notes, and snippets. - At the beginning of the VIX futures expiration cycle, the volatility ETPs constant 1-month maturity contract is comprised of 100% of the new M1 value and 0% of the new M2 value. The number of contract for the VIX futures is computed as the ratio of strategy fund to the price of the constant maturity one month VIX futures. Go long XIV at today’s close if the VIX index will close below the 1-month constant maturity price of VIX futures, or go long if it will close above. VIX measures market expectation of near term volatility conveyed by stock index option prices. By 1-month “constant maturity” price I’m referring to the mix of first and second month VIX futures contracts that achieves a 1-month weighted average maturity. Copyright, 2016, Chicago Board Options Exchange, Inc. Reprinted with permission. Cboe has granted S&P Dow Jones Indices a license to use the VIX methodology to create the S&P 500 VIX Futures Index. 1 The VIX® methodology is the property of Cboe Options Exchange (Cboe). Backtest: Comparing the VIX Index to 1-Month Constant Maturity VIX Futures, On Market Strength and the Whipsaw Regime, VIX Trading Strategies in November & December. $\endgroup$ – Alex C Feb 18 '16 at 3:42 Volatility Index (VIX®) Futures. This index is an average yield on United States Treasury securities adjusted to a constant maturity of 1 year, as made available by the Federal Reserve Board. Similarly, historical VIX term structures can offer insights into how the market's expectation of volatility of the S&P 500 has changed over time in response to market conditions. S&P 500 VIX 3-Month Futures Index TR – ETF Tracker The index is a total return index and is composed of futures contracts on the CBOE Volatility Index having a constant weighted average maturity of three months plus an interest component linked to the 91-day Treasury Bill rate. Summary stats below include both the original and revised strategy. I think it’s important that subscribers in the VTS community at least have a basic understanding of the complexity of these products as well as some of the potential drivers of possible strategies. When the strategies that we cover on our blog (including this one) signal new trades, we include an alert on the daily report sent to subscribers. Only SPX options that expire on Friday are used to calculate the VIX, and they are weighted to yield a constant maturity 30-day measure of the expected volatility of the S&P 500 index, according to CBOE. Regardless of what the stats might say, this twist on the strategy (while less convenient to follow) is intuitively more logical, because we’re comparing the VIX to a fixed value. first. Indeed, the VIX index is the most volatile and sensitive to the S&P500 index. OUR STRATEGY MAY NOT BE APPROPRIATE FOR ALL INVESTORS AND ALL INVESTORS SHOULD CAREFULLY CONSIDER THE POTENTIAL RISKS OF A STRATEGY AND THEIR OWN INVESTMENT OBJECTIVES BEFORE INVESTING IN ANY STRATEGY. These futures prices themselves start at roughly 30 and 60 days out (not exactly but close enough) and converge over time down to 0 days and 30 days at which time the front month expires and the 2nd month becomes the front month. Volatility ETF Trading Strategies - Part 4: VIX 30-day constant maturity. Series is calculated as the spread between 10-Year Treasury Constant Maturity (BC_10YEAR) and 2-Year Treasury Constant Maturity (BC_2YEAR). For each maturity, put and call options are used to calculate the implied volatility. Had we moved to cash rather than VXX, the equity curve would look as follows (XIV/VXX in blue, XIV-only in orange): I show these types of simple strategies not because I think they are sufficiently predictive to stand on their own (to the contrary, I’m certain that they’re not). The original strategy , comparing the VIX to front month futures, is a bit messy, because the front month contract represents something very different depending on how long remains until expiration. The detailed calculation is described in the next section. $\begingroup$ You have to linearly interpolate between two futures, one with maturity less than a month (the nearby VIX future) and one with maturity greater than a month (the second nearby). Plot below shows RV as a function of ATM IV. Hold until a change in position. VelocityShares launched XIV in late November 2010. We use a more complex modified version of this 30-day constant maturity as a filter signal among about eight others to reach trading decisions. The ETN formerly traded as the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) and had a maturity date of Jan. 30, 2019. This approach also allows us to decompose the return of the S&P 500 VIX Short-Term Futures ER MCAP Index into the price change of VIX futures (at … To simplify, we use the Black-Scholes model to determine the fixed-strike, fixed-maturity implied volatilities. VIX Methodology The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500 ® Index (SPX ℠) call and put options. The original strategy, comparing the VIX to front month futures, is a bit messy, because the front month contract represents something very different depending on how long remains until expiration. VIX central is a very useful website that not only gives the VIX futures delayed quotes, but also shows the term structure—a graph of the VIX Futures for the various expiration dates vs time. CBOE Volatility Index: VIX/10-Year Treasury Constant Maturity Rate. This is a twist on a common strategy for trading VIX ETPs (like XIV and VXX) that we’ve covered previously: comparing the VIX index to front month VIX futures. Constant maturity is an adjustment for equivalent maturity, used by the Federal Reserve Board to compute an index based on the average yield of … We see that the VX returns have a (noisy) positive dependency on the slope. The relationship between the constant 30-day maturity VIX Index and the S&P 500 is of interest to market participants. However just like with all indicators, it's only a part of the big picture and should only eve be viewed as one cog in the wheel. The near-term volatility, σ 1, and the next-term volatility, σ 2, are interpolated to arrive at a single volatility value, σ, with a constant maturity of 30 days to expiration. until expiry. Even with the well documented and easily observed underperformance the VXX market has made information regarding the equity market than spot VIX, which is a single constant. VIX, as the constant 30-day maturity VIX futures does, is due to the roll yield.In gure 2 we plot the VIX index, the VXX price and the constant 30-day-maturity VIX futures price, as in Zhang, Shu, and Brenner (2010), so the di erence is visually observable. THE INFORMATION AND ANALYSIS ON THIS SITE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY. I show them because I think they make good components of broader, more complete approaches. VIX1|VIX2 30 Day Constant Maturity . The recent negative performance in this strategy is a result of the observation I made in my previous post: On Market Strength and the Whipsaw Regime. For comparison purposes, here are our results over the same time frame: Awesome VTS Newsletter sign up - Claim your FREE 1 month trial now! This approach also allows us to decompose the return of the S&P 500 VIX Short-Term Futures ER MCAP Index into the price change of VIX futures (at constant one-month maturity) and roll yield/cost. S&P 500 VIX 4-Month Futures Index – constant maturity 4 months, long the fourth and the fifth VIX futures contract months S&P 500 VIX Mid-Term Futures Index – constant maturity 5 months, long the fourth, fifth, sixth, and seventh VIX futures contract months (rolling from the fourth to the seventh) As such, the VIX Index calculation may use different risk-free interest rates for near- and next-term options. As an illustration, the realized historic volatility is about 10% for Put strategy, 5% for Strangle strategy, and 50% for the VIX … Volatility and Risk – Exploring and Contrasting the Effectiveness of VIX Futures as a Diversification Tool in Equity Portfolios Abstract We assess the effectiveness of CBOE volatility index (VIX) based futures index and related Exchange-traded products in reducing downside risk and providing tail risk protection to predominantly equity portfolios. From VXX's inception date (January 2009) to maturity date (January 2019), the product lost 99.99% of its value because the VIX futures are usually in contango. NOTHING HEREIN SHOULD BE INTERPRETED AS PERSONALIZED INVESTMENT ADVICE. S&P 500 VIX 3-Month Futures Index TR – ETF Tracker The index is a total return index and is composed of futures contracts on the CBOE Volatility Index having a constant weighted average maturity of three months plus an interest component linked to the 91-day Treasury Bill rate. Backwardation is incredibly uncommon in the VIX futures curve. 1 The VIX® methodology is the property of Cboe Options Exchange (Cboe). In this series of five posts I’m going to be going into a little more detail about some of the most common methods of trading the various volatility ETP’s such as XIV and VXZ. The five part series will cover: Volatility products like the XIV derive their price based on rolling purchases of the 1st and 2nd month VIX futures prices. * I’ll update the charts and commentary in these very old articles every now and then so that the data is stretched over longer periods of time. In other words, VXX $\endgroup$ – Alex C Feb 18 '16 at 3:42 The key advantage of using the constant maturity VIX futures is that it provides a homogenous exposure to the VIX futures rolls and the sensitivity to the S&P500 index. This is the process … Documents about VIX ETFs explain this calculation in detail with examples. VXX is designed to track a constant 30-day maturity VIX future, which means constant exposure to VRP. The front month VIX futures becomes also more volatile as it moves closer to its settlement day. Introduced in 2004 on Cboe Futures Exchange ℠ (CFE ®), VIX futures provide market participants with the ability to trade a liquid volatility product based on the VIX Index methodology.VIX futures reflect the market's estimate of the value of the VIX Index on various expiration dates in the future. “Constant Maturity Treasury” rates or CMTs), to which a cubic spline is applied to derive yields on the expiration dates of relevant SPX options. This is UX1 for the VIX futures with approx. Conversely, when the VIX Index is above the near-term VIX futures (a state of "backwardation"), the contracts will gain value over time, which leads to appreciation in VXX. Unlike the VIX index, the fixed-strike volatilities are model-dependent. In short, because of the extreme (but ultimately, unsustainable) market strength of the last 1+ year, what have traditionally been signs of impending weakness in XIV/ZIV (in this case, VIX > 1-month constant maturity) has repeatedly caused many of these simple strategies to move to a defensive posture (cash or long vol) just as the market is making a rebound. Standard SPX options expire on the third Friday of each month and weekly S&P 500 options expire on every other Friday. YOU, AND YOU ALONE, ARE SOLELY RESPONSIBLE FOR ANY INVESTMENT DECISIONS YOU MAKE. 30-Yr Constant Maturity Rate (1980-2020) Source: St. Louis Federal Reserve. The volatility index is primarily used as an indicator of investor sentiment and market expectations. Thus these time series represent the history of a constant maturity futures. Units: Percent, Not Seasonally Adjusted Frequency: Daily Notes: Starting with the update on June 21, 2019, the Treasury bond data used in calculating interest rate spreads is obtained directly from the U.S. Treasury Department. If the VIX Index is below the 30-day constant maturity, this means the futures price will tend to fall as it converges towards the spot VIX and provides a tail wind for XIV, If the VIX Index is above the 30-day constant maturity, this means the futures price will tend to rise as it converges towards the spot VIX and provides a tail wind for VXZ. with a redemption value that depends on the level of the S&P 500 (SPX) VIX Short-Term Futures Total Return index (SPVXSTR). This approach also allows us to decompose the return of the S&P 500 VIX Short-Term Futures ER MCAP Index into the price change of VIX futures (at constant one-month maturity) and roll yield/cost. UNDER NO CIRCUMSTANCES DOES THIS INFORMATION REPRESENT A RECOMMENDATION TO BUY, SELL OR HOLD ANY SECURITY. But on that day VXXB has 100% rolled over to the successor VIX futures contracts that have another 30 calendar days before they expire—so VXXB is really providing a weighted maturity volatility expectation of 60 days, not 30. Uses and interpretation . More recently, several volatility-related Exchange Traded Notes (ETNs) have provided investors with equity-like long and short exposure to constant maturity futures on the VIX, and even dynamic combinations of long-short exposures to different maturities. As such, the VIX Index value calculation may use different risk-free interest rates for near- and next-term options. The Vix futures trade on the CFE/CBOE exchange. referred to as Constant Maturity Treasury rates), to which a cubic spline is applied to derive yields on the expiration dates of relevant SPX options. The Vix futures trade on the CFE/CBOE exchange. 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