Evolving my strategy for capturing volatility gains

Author: Robert Zingale

Covestor model: Volatility Mean Reversion

The consistent fear of the European debt crisis caused volatility to behave erratically during the second half of 2011. This caused VIX futures to enter into backwardation for a prolonged period of time, which made the VIX roll-yield work against my short volatility position.  This forced me to reevaluate my strategy and find ways to generate and protect returns during any investment environment. Therefore, I switched my strategy to focus on hedging VXX with a VXZ position or solely shorting VXZ depending on the VIX term structure.

This alternative strategy is based on Monte Carlo simulations, which revealed the optimal VXX/VXZ allocations at different shapes of the VIX term structure.  I wrote about these volatility hedging strategies on Seeking Alpha and was contacted by a volatility hedge fund manager, who was interested in my help to further research optimal hedging strategies for volatility.  The analysis from this research has now formed the basis for my current volatility strategy.  I will continue to perform this strategy into 2012.

My allocation strategy based on the term structure of the VIX futures is according to this table: