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The Evolving Dynamics of VIX Futures: Practical Implementation


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1. Overview of the Dynamics of the Term Structure Curve and VIX Futures Market

2. Practical Implementation

3. Changing Market Environment and the Impact on Alpha Generating Strategies

4. Trading Examples: Positioning in Different Regimes

5. Conclusion

TOPICS OF DISCUSSION


Overview of the Dynamics of the Term Structure Curve and VIX Futures Market


TERM STRUCTURELong-term average (19. October 2011)

Source: CBOE/Principalium

19

19.5

20

20.5

21

21.5

22

22.5

23

0 30 60 90 120 150

TS Average

Delta: 4.9%

Delta: 7.8%


Overview of the Term Structure CurveContango and Backwardation

Source: Easy Volatility Investing, T. Cooper /Principalium


TERM STRUCTURERoll Yield and Volatility Risk Premium (VRP)


CONTANGO: Percentage difference between second month and first month VIX future. This

measure looks at the shape of the VIX futures relative to each other to gauge what the drag/yield

might be from the futures “rolling down” the curve each day.

ROLL-YIELD: Spread between VIX futures and spot VIX. This measure looks at the shape of the

VIX futures relative to spot VIX to gauge what the drag/yield might be from the futures “pulling to

spot” each day.

VOLATILITY RISK PREMIUM: Spread between spot VIX and short-term realized volatility. This

measure compares expected volatility (spot VIX) to realized volatility, and serves as a gauge of

momentum.


Volatility Risk Premium (VRP)



VIX FuturesBasic contract characteristics


Basic Contract Characteristics

Ticker Symbol VX

Contract Multiplier $1,000

Minimum Tick Value $0.05

Settlement Value VRO- Special Opening Quotation

that uses a VIX-style calculation.

Weekly Contract Available? Yes- but not very liquid

Pricing Method Supply & Demand


Premium of 1st Future versus VIXVIX (blue) vs 1st future contract a month ago (red)


0

10

20

30

40

50

60

70

80

90

2006-11-20 2007-10-15 2008-09-05 2009-07-29 2010-06-21 2011-05-11 2012-04-02 2013-02-26 2014-01-16 2014-12-08 2015-10-29 2016-09-21 2017-08-14

VIX Index VIX 1.fut 22d-bw


Premium of 1st Future versus VIXPremium mostly mean reverting and positive over time


-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

LOG(1.vix fut bw) - LOG(vix) 50-d average


OVERVIEW OF EQUITY MARKET VOLATILITYCharacteristics of equity market volatility – mean reverting

Source: Principalium & Bloomberg

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%1950

-02-0

1

1951

-11-2

1

1953

-09-0

8

1955

-06-2

3

1957

-04-0

8

1959

-01-2

1

1960

-10-3

1

1962

-08-1

6

1964

-06-0

2

1966

-03-1

5

1967

-12-2

7

1969

-11-1

9

1971

-08-3

1

1973

-06-1

4

1975

-03-2

6

1977

-01-0

5

1978

-10-1

7

1980

-07-2

9

1982

-05-1

1

1984

-02-1

7

1985

-11-2

9

1987

-09-1

1

1989

-06-2

2

1991

-04-0

4

1993

-01-1

3

1994

-10-2

4

1996

-08-0

5

1998

-05-1

8

2000

-02-2

9

2001

-12-1

4

2003

-09-3

0

2005

-07-1

4

2007

-04-3

0

2009

-02-1

0

2010

-11-2

2

2012

-09-0

5

2014

-06-2

3

2016

-04-0

6

21-day rolling vol average vol


Characteristics of equity market volatility - Negative correlation to equity markets

Source: Principalium & Bloomberg

S&P 500 and VIX Index Values One-Year Correlation of S&P 500 and VIXS&P 500 and VIX Index Values One-Year Correlation of S&P 500 and VIX

OVERVIEW OF EQUITY MARKET VOLATILITY

500

1000

1500

2000

2500

0

10

20

30

40

50

60

70

80

90

VIX Index S&P Fututres

-0.92

-0.87

-0.82

-0.77

-0.72

-0.67

-0.62

-0.57

-0.52

-0.47

1-year rolling correlation


ETNs:• VXX = an iPath ETN from Barclays

• XIV = VelocityShares ETN from Credit Suisse

ETFs:• VIXY = ProShares ETF that moves like the VXX

• SVXY = ProShares ETF that moves like the XIV

Strategies:• Long Volatility Strategies (Tail risk)

• Short Volatility Strategies

• Multi-Asset Volatility Strategies

• Directional Volatility Strategies

• Long/short Volatility Strategies

• Arbitrage Volatility Strategies (capturing Volatility Risk Premium)

• Combinations of above Strategies and Products

Volatility Products and StrategiesOverview


Practical Implementation


PRINCIPALIUM VOLATILITY STRATEGYProprietary approach

Position

Position

Position

Position

Position

Position

Position

Position

Spot<X

Spot>X

X<Y

X<Y

X>Y

X>Y

Slope

Slope

Slope

Slope

Slope

Slope


Changing Market Environment and the Impact on Alpha Generating Strategies


TERM STRUCTUREIs this time different ? Long-term average (19. October 2011) vs 2017 environment


10

12

14

16

18

20

22

24

0 30 60 90 120 150

TS Average TS Average 2017

Delta: 4.9%

Delta: 7.8%

Delta: 22.2%

Delta: 12.7%


SPIKES AND VOLATILITY EVENTSFastest volatility mean reversion ever

Source: Bloomberg, Principalium

0

100

200

300

400

500

600

700

800

900

1000

Days mean reversion


MARKET FLOWS% Share of Long Open Interest and % Share of Short Open Interest

Source: CTFC, Principalium

Time evolution of Long Position Open Interest Pct market share Time evolution of Short Position Open Interest Pct market share


The risks are the usual market risks (such as liquidity) plus the following volatility-specific

risks:

• Volatility drag

• Timing synchronization risk

• VRP-roll yield convergence risk

• Regime change risk, and

• Steamroller risk

RISKSVolatility Specific Risks


Trading Examples: Positioning in Different Regimes


Conclusion


• Low volatility regime: VIX trading is much more “technical”

• React rather than Predict

• Always try to have the risk-premiums in your favor

• Willingness to sit through drawdowns (dynamic scaling)

• Low human intervention

Conclusion


Alex Orus [email protected] +41 79 404 6777

Wiesenstrasse 13

CH - 8834 Schindellegi

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The Evolving Dynamics of VIX Futures: Practical Implementation › rmc › 2017 › alex-orus-principalium-cboe-conference… · • SVXY = ProShares ETF that moves like the XIV Strategies: