Trading stat actual on 14/04/2019
The main idea that stands behind of volatility selling is that risk usually always overestimated and the price of the insurance as result is overpriced as well. Another rule is that far standing event will be usually associated with more risk, then near standing one. This is fundamental reason why the volatility futures term structure almost always in contango. With rare cases of reversion into backwardation that usually related to the stock market decline. The process of volatility selling is a part of futures premium collection that can be very profitable. The key element of this process is risk management and avoiding to be at the market during the period of instability. This is a very big challenge and has to be very reliable predictive ability to forecast this period of the storms in the stock market. In the article below explained how Hermesfund handles these issues.
Below is introduction of the backtested trading strategy that Hermesfund at Etoro uses as core model. Additionally in Hermesfund realized hedge trading to mitigate a sharp spike in VXX.
To manage by position size and to define periods of time to sell indexes for short or to close position in VXX Hermesfund use:
- Macroconomic model (link here)
- VIX fron and back futures database (link here)
- Position rebalancing on the monthly basis Cash/VXXB equal-weighted . To mitigate volatility and to redice risk of DD fund using macroeconomic forecast can insted of cash to open short positon in indexes.
Based on historical records of backtested trading strategy CAGR is 24% and trading stat plotted below. This is the unhedged version of VXX/VXXB inverse trading. Due to restrictions applied by Etoro for trading by uncovered short of VXXB, the trading strategy has been suspended from February to April 13 and now fully resumed according to the core trading plan.
Starting of the year strategy was able to show outstanding result +31,03%. Total return since inception is 1 012 %. Max DD is – 43 %.
The best years: 2017, 2016 and 2012 with return 76.12%, 70.11% and 76% respectively.
Worst years: 2018 – decline is – 43.50% and 2011 with negative result – 23,17%.
Full data of monthly return trading strategy is below: