Constant maturity is an adjustment for equivalent maturity, used by the Federal Reserve Board to compute an index based on the average yield of … 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. The volatility index is primarily used as an indicator of investor sentiment and market expectations. Even with the well documented and easily observed underperformance the VXX market has made 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 … 1 The VIX® methodology is the property of Cboe Options Exchange (Cboe). VXX is designed to track a constant 30-day maturity VIX future, which means constant exposure to VRP. We see that the VX returns have a (noisy) positive dependency on the 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) As such, the VIX Index value calculation may use different risk-free interest rates for near- and next-term options. 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. 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. My answer assumes prior knowledge of the basic workings of the VIX index and futures contracts. information regarding the equity market than spot VIX, which is a single constant. CBOE Volatility Index: VIX/10-Year Treasury Constant Maturity Rate. Yields are interpolated by the United States Treasury from the daily yield curve. YOU, AND YOU ALONE, ARE SOLELY RESPONSIBLE FOR ANY INVESTMENT DECISIONS YOU MAKE. As such, the VIX Index calculation may use different risk-free interest rates for near- and next-term options. This is UX1 for the VIX futures with approx. 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. 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. 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. Plot below shows RV as a function of ATM IV. 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. NOTHING HEREIN SHOULD BE INTERPRETED AS PERSONALIZED INVESTMENT ADVICE. $\endgroup$ – Alex C Feb 18 '16 at 3:42 Backwardation is incredibly uncommon in the VIX futures curve. This is the process … Thus these time series represent the history of a constant maturity futures. 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. Uses and interpretation . Hold until a change in position. 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. VelocityShares launched XIV in late November 2010. 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. * 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. Indeed, the VIX index is the most volatile and sensitive to the S&P500 index. 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) 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. 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. rolls continuously throughout the month to maintain a constant maturity and adjusts its holdings of VIX futures to maintain a constant vega exposure. 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. So over time, the ETP buys a high priced futures contract on the VIX, and then later sells it to purchase another maturity. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE RESULTS SIMILAR TO THOSE SHOWN. 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. first. UNDER NO CIRCUMSTANCES DOES THIS INFORMATION REPRESENT A RECOMMENDATION TO BUY, SELL OR HOLD ANY SECURITY. 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 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. “Constant Maturity Treasury” rates or CMTs), to which a cubic spline is applied to derive yields on the expiration dates of relevant SPX options. VelocityShares Daily Inverse VIX Short-Term ETN offers inverse one-month constant-maturity exposure to VIX futures. 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. Documents about VIX ETFs explain this calculation in detail with examples. 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. 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. 1 The VIX® methodology is the property of Cboe Options Exchange (Cboe). 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. Volatility ETF Trading Strategies - Part 4: VIX 30-day constant maturity. 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. 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. Documents about VIX ETFs explain this calculation in detail with examples. GitHub Gist: instantly share code, notes, and snippets. If you would like an introduction, please read my answer to How does the VIX index and its related futures contracts work? 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. To simplify, we use the Black-Scholes model to determine the fixed-strike, fixed-maturity implied volatilities. Series is calculated as the spread between 10-Year Treasury Constant Maturity (BC_10YEAR) and 2-Year Treasury Constant Maturity (BC_2YEAR). 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. Summary stats below include both the original and revised strategy. 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. Capturing the constant maturity volatilities helps traders visualize and track the behavior of volatility over time providing context to current market implied volatility. 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. For comparison purposes, here are our results over the same time frame: Awesome VTS Newsletter sign up - Claim your FREE 1 month trial now! 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. 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. 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. 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. To learn more about this please check out my dedicated article called VIX futures term structure explained. Copyright, 2016, Chicago Board Options Exchange, Inc. Reprinted with permission. 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