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VIX Strategy testing on Quantconnect


Simple Vix System

Given Quantopian’s abandonment of personal automated trading I’m not surprised the refugees come over here. Especially since Python is now possible. What I would really need to trade VIX algorithmically is an automatically generated front month concatenated futures contract also showing spot VIX so as to be able to compute my favoured measure of contango/backwardation.

Although presumably one could just keep taking in the individual front month contract.

The big worry on XIV of course is a termination event. While VXX may seem unlikley to terminate (although I have not checked the prospectus) it is designed to go bust anyway and will just have another price consolidation (reverse split). I guess the bigger worry however is that the managers may not be able to purchase futures contracts (to rebalance and maintain 1x leverage) during a spike in vol since the vast short brigade will be competing to gain cover and reverse their shorts.

Nonetheless a safer route to long XIV may just be deep ITM VXX puts.

I much look forward to working on Quantconnect now it has integrated Python.

I must say that my VIX adventure so far is a simple monthly rebalance between an inverse VIX fund such as XIV and a geared bond fund based on simple inverse volatility. Maximum drawdown on back testing is vastly reduced but of course the low correlation may not hold and XIV may suffer a liquidation event.

However, provided a liquidation event only occurs once in a blue moon, the method should enable one to survive. And you need to be ready with an alternative way to short VIX. Shorting VIX options seems hopeless. I can find little joy there although theoretically of course the options are based on futures. Nonetheless trading monthly VIX puts does not produce anywhere like the performance of a monthly short of the futures front month.

Perhaps I have made an error somewhere.

Anyway, I’m a Quantopian refugee although I have to say I had not been active there for about a year.  I suggested they “offer bread today not jam tomorrow” and they seem to have heeded me as regards their competition. Nonetheless Quantopian is of limited interest to many now that you can no longer trade using their framework. Especially since few have interest in the model they want to trade for their hedge fund– a very low beta long short US equity approach.  A bog standard and (in my view at least) uninteresting approach.

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