CAPTURING THE VIX FUTURES ROLL YIELD

Our trading strategy utilizes the VIX term structure as a tool for gaining valuable insights on market sentiments. We identify the relationship between VIX futures prices and maturity dates, which can be either contango or backwardation. The slope of the VIX term structure is also a leading indicator and usually changes direction before volatility changes.

To execute this strategy, we use volatility ETNs, such as SVXY, which is a portfolio of short front and next month VIX futures. We have observed that the VIX quite often leads the S&P 500, and when this occurs, the signal lets us know whether to be long or short.

Additionally, we consider the difference between future and cash prices, which is often called roll yield. When the VIX futures term structure is in contango, roll yield is positive, and when it is in backwardation, roll yield is negative. We use a combination of the VIX term structure and roll yield to trade VIX ETNs.

When roll yield is positive over time, VIX ETNs tend to lose value. To earn a positive return, we take a long position in inverse VIX ETN, such as SVXY. However, buy and hold SVXY performance is mediocre. Therefore, we can improve the performance by making use of roll yield. We go long SVXY when roll yield is positive, and when yield is negative, we go long VXX. This strategy allows us to effectively trade VIX ETNs by using a combination of, VIX term structure, and roll yield to make informed trading decisions.