While an individual position in VIX futures or VXX, the Barclays iPath 1-month constant maturity tracker, offers no opportunities for diversification of equity exposure empirical findings show that VIX futures term structure can be used as a stock market predictive tool and that the negative slope of the structure can be considered as a contrarian market timing indicator.
Lawrence McMillan reported a roll-yield arbitrage strategy based upon the differential between the first and third month VIX futures.[2,3,4] In short, the system goes long VXX calls if third-month-out $VIX futures settle at a lower price than front-month $VIX futures. The system’s net asset value (NAV) exceeds 3, win rates on low numbers of transactions average around 67%, and unattended drawdowns come in at less than 20%. Notably, McMillan recommends that the system function as a trade signal generator whose signals need be qualified by subsequent price activity.
- Alexander and Korovilas (2012) reported that an individual position in VIX futures, or VXX, the Barclays iPath 1-month constant maturity tracker, offers no opportunities for diversification of equity exposure, except during the onset of a major crisis. In short, they should be entered only as short-term speculative trades.
- Lawrence McMillan (2012) Options Strategist Newsletter (February 9, 2012).
- Lawrence McMillan (2017) Options Strategist Newsletter (April 7, 2017).
- Lawrence McMillan (2018) Proactive Advisor Magazine (May 10, 2017).