VXX strategy backtesting

Discussion in 'Round Table Presentations' started by Amod, Dec 31, 2017.

  1. Amod

    Amod Guest

    I was intrigued by Mark Sebastian's long term VXX put trades and decided to understand the trade better using backtesting. For the purpose of the backtest I bought the historical EOD option data and programmed the rules in a custom R back-tester. This allowed me to backtest the strategy going all the way back to Jan 2012. My main concern was to understand the risk and the nature of drawdowns. The only thing I haven't programmed in is to filter out being in the trade when in backwardation. Once I get my hands on the VIX futures data, I'll program that in and see how it changes the results.

    Overall, the results of the strategy were pretty impressive.

    * Annualized return: 17.57%
    * Annualized Std. deviation: 15%
    * Annualized sharpe ratio: 1.19

    The max-drawdown is in the 15% range with occasional drawdowns in the 10% range (see attached image). I wish VXX options were around in 2008-2009 timeframe to understand the severity of drawdowns back then. My next steps are to program in the backwardation calculations and seeing if staying out of the trade during that time helps it any better or not. Wanted to share this data point as it might pique the interest of fellow traders.

    Attached Files:

  2. status1

    status1 Well-Known Member

  3. Amod

    Amod Guest

    Thanks. The strategy is mostly long puts so there it is less risky than shorting puts. Mark gives a good rationale for the strategy in his roundtable presentation.
  4. status1

    status1 Well-Known Member

    Is that the video from 2013 or does he have a more recent one (this tear preferably) ?
    I skipped through that video and that was mostly an explanation about how the VIX and VXX work and than he mentioned that he has long term puts on the VXX but he did not show any real trades

    Does he have any real trade examples or any trading rules ?
    It may make a difference between the way he trades it and the way you back test it
    What does he mean by "long term" ? 3 mo 6 mo 9 mo out ?
    Which put does he buy ? ATM DITM ?

    You would have to count on the VXX going down faster than the theta decay by the expiration day so you would have negative p/l for most of the trade unless you time your trade to buy it on a spike but of course the price of the put is going to be higher too and what happens after you waited 6 months for the trade to have positive p/l and a few days before you want to take the trade off VXX goes up and washes out all your gains

    Maybe this was working better in 2013 when volatility was more reasonable I am not sure how well that would work in this low vol environment since it's so low it can spike up on any kind of small news event and waste a trade that you were waiting for 6 mo

    I think there are too many unanswered questions on this trade for me to even consider it as a viable trading strategy
    Either way I don't see this as an easy way to make money There are much easier and simpler ways to make money IMHO
  5. vega4mike

    vega4mike Well-Known Member

    The strategy has worked well in 2017 & will continue to do well as long as VIX term structure is in contango. The recent VXX reverse share split at 4:1, saw VXX re-issued at about $40, this was sometimes in August 2017, current price of VXX is about $28, your long term atm puts will now be deep ITM. Vix spikes, flatteening of the term structure or backwardation will see drawdowns & depending on the severity of the spikes, these drawdowns may be temporary or prolonged. But by all accounts the strategy has worked so far. VXX since inception is down about 90%, hence, the reason for the reverse splits (5 so far) & if this low vol continues, expect another one in 2018 as VXX will eventually trade down to sub 10, which tends to trigger a reverse split. This will change if we have a prolonged VIX spike and continued backwardation.
    If your more experienced with vol trading, you can always hedge with cheap VIX call spreads, but these will lower your overall returns. I think Mark is generally long & short vol in his portfolio & will lean more short or long depending on the shape of the VIX term structure.
  6. comintel

    comintel Member

    "Is that the video from 2013 or does he have a more recent one (this year preferably) ?"
    He discusses this strategy briefly toward the end in

    but again it is brief.
    Last edited: Jan 1, 2018
  7. vega4mike

    vega4mike Well-Known Member

    I didnt do the backtest, that piece of hardwork belongs Amod, I was just adding my comments to the thread.
  8. comintel

    comintel Member

    I fixed it.
    Thanks to Amod for the back-test and to you for your summary of current performance!
    Last edited: Jan 1, 2018
  9. Amod

    Amod Guest

    Thanks comintel.
    I wasn't sure if it was ok to post the rules of the strategy in this public forum, but it probably makes sense to post the rules I used to put the backtest in context, so here they are:
    * Buy ATM money puts worth $10k, closest to 1 year out expiration. Buy at ask price for the put.
    * Sell the put if VXX is reverse splitting the next day or if expiration is < 30 days out. Sell at bid price.
    * Again buy $10k worth of ATM puts, closest to 1 year out and repeat.

    Period of backtest: 2012-01-03 through 2017-11-30.

    I used ask for buy and bid for the sell since that'll most probably be the prices that I get executed at.
  10. status1

    status1 Well-Known Member

    Thanks for the more recent video
    As I suspected and was mentioned in the video This is not for buy and hold
    This is for day trading quick in and out which I cannot do because I am working but even if I had the time I would probably choose something else to day trade Still not sure how exactly he is doing it but if he is long and short vol and you have to balance them it's sounds way too complicated for me not to mention that I am not sitting near a pc to watch them all day
  11. ACS

    ACS Well-Known Member

    Anyone know how buying VXX puts compares to being long an equivalent amount of XIV? Seems like a lot more edge given away with the puts but do they make more money?
  12. Amod

    Amod Guest

    I haven't backtested it yet, but it seems like VXX puts have the slight advantage that when vol rises the put value also rises, even though the price is moving upwards. This should in theory cushion the loss a bit. Anywho, that is just a conjecture at this point giving my limited observation of VXX puts over time.

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