My short-long VIX strategy is ready to roll

Author: Robert Zingale

Covestor model: Volatility Mean Reversion

In July, I resumed my short Barclays iPath S&P 500 VIX Short-Term Futures (VXX) and long Barclays iPath S&P 500 Mid-Term Futures (VXZ) strategy. Reason: mid-term VIX futures (VXZ) were less elevated and provided a better hedge for VXX. This hedged pair performed well given the volatile month of July.

I intend to maintain this trading approach as long as the average of the 5th and 6th month VIX futures does not rise more than 35% above 1st month VIX futures.

VXZ does not effectively hedge VXX when VIX futures ratios are above 35% due to the following:
a)    Short-term VIX futures tend to be below their mean-reverting level.
b)    Mid-term VIX futures tend to be at least equal to their mean-reverting level.
c)    Impact from combining a) and b) is short-term VIX futures tend to rise while mid-term VIX futures stay constant.

Therefore, if this ratio exceeds 35%, then I intend to switch back to a short VXZ position.

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