Original paper
Abstract
I developed in a previous working paper the Sidre and Most-Strategy. The strategy relies on the typical termstructure of VIX futures. The Calvados is a refined and condensed version of these strategies. The starting point was a paper of Simon and Campasano. The authors demonstrate that the VIX futures basis does not have significant forecast power for the change in the VIX spot index, but does have forecast power for subsequent VIX futures returns. It is especially profitable to short VIX futures contracts when the basis is in contango.
The original Calvados working paper presented improved metrics and parameter settings of the Simon&Campasano approach. The current working paper improves the original work in several points and extends the historic backtest.
The overall patterns of the original results are reassured and improved upon. The Calvados is traded in the Sybil-Fund. It is so far the pick of the bunch. One gets a lot of fun for a medium dose of risk.
Keywords:Â VIX Futures Trading
Trading rules
- Engage in trades using VIX futures, and employ the E-mini S&P 500 for hedging.
- When in contango and the daily roll > 0.10 points, sell the nearest VIX futures that still have over 10 business days until maturity.
- When in backwardation and the daily roll < -0.10 points, buy the nearest VIX futures that have more than 10 trading days left to maturity.
- Hold the position for a span of 5 business days and use corresponding E-mini S&P 500 positions to hedge against fluctuations in the spot VIX.
- Calculate daily roll as (front VIX futures price - VIX) / number of business days until settlement.
- Determine hedge ratios using regression analysis of VIX futures price changes and E-mini S&P 500 percentage changes.
Python code
Backtrader
import backtrader as bt
import numpy as np
from sklearn.linear_model import LinearRegression
class VIXFuturesStrategy(bt.Strategy):
def __init__(self):
self.vix = self.datas[0]
self.vix_futures = self.datas[1]
self.es = self.datas[2]
self.order = None
self.hold_days = 0
def next(self):
if self.order:
return
if self.hold_days > 0:
self.hold_days -= 1
return
days_to_maturity = self.vix_futures.days_to_maturity() # Implement this in your data feed
if days_to_maturity < 10:
return
daily_roll = (self.vix_futures[0] - self.vix[0]) / days_to_maturity
if daily_roll > 0.10:
position_size = self.broker.getvalue() * 0.9 / self.vix_futures # Adjust based on your risk management
self.sell(data=self.vix_futures, size=position_size)
hedge_ratio = self.calculate_hedge_ratio()
self.buy(data=self.es, size=position_size * hedge_ratio)
self.hold_days = 5
elif daily_roll < -0.10:
position_size = self.broker.getvalue() * 0.9 / self.vix_futures # Adjust based on your risk management
self.buy(data=self.vix_futures, size=position_size)
hedge_ratio = self.calculate_hedge_ratio()
self.sell(data=self.es, size=position_size * hedge_ratio)
self.hold_days = 5
def calculate_hedge_ratio(self):
vix_futures_returns = np.diff(np.log(self.vix_futures.get(size=252))) # 1-year lookback
es_returns = np.diff(np.log(self.es.get(size=252))) # 1-year lookback
lr = LinearRegression()
lr.fit(es_returns.reshape(-1, 1), vix_futures_returns)
return -lr.coef_[0]
def notify_order(self, order):
if order.status in [order.Submitted, order.Accepted]:
return
if order.status in [order.Completed]:
if order.isbuy():
self.log(f'BUY EXECUTED, {order.executed.price}')
elif order.issell():
self.log(f'SELL EXECUTED, {order.executed.price}')
elif order.status in [order.Canceled, order.Margin, order.Rejected]:
self.log('Order Canceled/Margin/Rejected')
self.order = None