A volatility index hedging strategy built for this market


Author: Robert Zingale

Covestor model: Volatility Mean Reversion

Currently, short-term VIX futures are experiencing rolling costs (first to second month futures) greater than 10%, which is working in favor of my short position in the iPath S&P 500 VIX Short Term Futures ETN (VXX) position.

Therefore, I plan to maintain my current asset allocation strategy of shorting 100% of VXX and going 100% long on the S&P Mid-Term Volatility Index (VXZ) while these rolling costs remain above 6.5%.

However, if current month VIX futures fall to new 52-week lows, I will consider entering a short 100% VXZ position. The reason for this is to reduce price exposure from VIX futures when they are significantly below their mean-reverting level.

I expect rolling costs to remain above 6.5% as investors remain cautious about slowing global economic growth, especially in Europe. Additionally, since equity prices are nearing pre-crisis highs, demand for protective puts will likely remain elevated to preserve portfolio gains. This could put a floor on the level VIX.

This same demand for portfolio protection should also keep VIX futures in a state of contango as investors remain more cautious about next month VIX futures than the current month. However, if the rolling costs fall below 6.5%, I will reduce exposure accordingly. If contango is above 16% before May’s future expiration, I plan to short additional VXX to exploit the VIX future’s convergence at expiration.

  • cma6

    “I plan to maintain my current asset allocation strategy of shorting 100%
    of VXX and going 100% long on the S&P Mid-Term Volatility Index (VXZ) while these rolling costs remain above 6.5%.”
    Bob, will that be dollar for dollar, short VXX and long VXZ?
    ” if current month VIX futures fall to new 52-week lows, I will consider entering a short 100% VXZ position.”
      You would be 100% short VXX plus 100% short VXZ at new lows in a mean-reverting tradable?
       Please explain.