XIV ETF Volatility Trading Strategies Part 4 – 30-day Constant Maturity

by | Nov 4, 2013

 

* 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 *

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. This is not a teaching website, but I think it’s important that subscribers at least have a basic understanding of the complexity of these products as well as some of the potential drivers of possible strategies. The five part series will cover:

VIX Term Structure
Volatility Risk Premium (VRP)
Mean Reversion
30-day Constant Maturity
VIX : VXV Ratio

 

Part 4: 30-day Constant Maturity

Volatility products like the XIV derive their price based on rolling purchases of the 1st and 2nd month VIX futures prices. These futures prices themselves start at roughly 30 and 60 days (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.

A 30-day maturity just means that we are averaging out the number of days on these contracts so that the 1st month is a constant 30-day maturity instead of converging down to 0 days.

  • 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

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 that while useful to a degree should only ever be a cog in the wheel.  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.  For comparison purposes, here are our results over the same time frame:

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