Volatility ETF Trading Strategies - Part 4: VIX 30-day constant maturity

* 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. Last updated Nov 2015 *

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. 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. The five part series will cover:

• VIX Futures 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. To learn more about this please check out my dedicated article called VIX futures term structure explained. 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.

A 30-day constant maturity just means that we are averaging out the number of days on these contracts to represent how much weighting the volatility ETP has towards each futures contract so that it's a constant 30-day rolling contract converging down to 0 days and the spot/cash VIX index.

• 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 and a very useful one. However just like with all indicators, it's only a part of the big picture and should only eve be viewed as one 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: