Long/Short VIX Futures


An Excel Spreadsheet (.xlsx) enabling backtesting of long/short positions in VIX futures contracts based on the level of “contango” and Spot VIX

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Shorting volatility on the S&P 500 has been a vastly profitable trade for some over the past few years.  It is also a vastly dangerous trade with huge potential losses and should be embarked upon (if at all!) only by the most experienced investors who have pockets deep enough to play such a lethal game. And even then they would be ill advised to risk more than a tiny proportion of their investable capital in such a trade.

The possibility of shorting (or going long) volatility began in 2004 with the introduction by the CBOE of relevant futures contracts. To quote the CBOE:

“The Cboe Volatility Index® (VIX® Index) is considered by many to be the world’s premier barometer of equity market volatility. The VIX Index is based on real-time prices of options on the S&P 500® Index (SPX) and is designed to reflect investors’ consensus view of future (30-day) expected stock market volatility. The VIX Index is often referred to as the market’s “fear gauge”.  The VIX Index is the centerpiece of Cboe Global Markets’ volatility franchise, which includes volatility indexes on broad-based stock indexes, exchange traded funds, individual stocks, commodities and several strategy and performance based indexes, as well as tradable volatility contracts, such as VIX options and futures.  These revolutionary volatility products can offer investors effective ways to help manage risk, leverage volatility and diversify a portfolio.”

Non professional investors wishing to short volatility would be better advised to use an inverse volatility ETF such as XIV or SVXY (which avoid unlimited liability) but the problem is that such ETFs have a very short trading history – none were trading during the dramatic 2008 financial crisis.

For that reason traders or investors wishing to get a better idea of how such products may behave during the next market crisis would be better to back test futures contracts since these go right back to 2004. However, few will have the necessary skill or knowledge to assemble the all important concatenated price series from individual futures contracts and this spreadsheet aims to remedy that.  The spreadsheet contains spot VIX prices as well as individual futures contracts between 2004 and October 2017 for the front month and two further months out. Purchasers can update these prices from Quandl.com or the CBOE itself.  A concatenated price series is calculated for the rolling “front” month, showing an accurate record of how an investor would have fared by adjusting a daily short portfolio of a 1x leveraged futures contract.  Purchasers can extend this on their own to the next two further out contracts, if they are reasonably familiar with Microsoft Excel.

This spreadsheet contains no macros and no VBA code. Merely standard Excel formulae and charts. Those with no coding experience should therefore be rapidly able to pick up the rationale of the back tests provided.

There are two “backtests”. One is simply a constant 1x leveraged short position in the VIX front month. (You can easily change it to a long position if you wish, or add a further “long” column).  The other is a simple system which can be modified and adapted without too much difficulty.  As drafted, this second simple system aims to be “short” VIX futures when “contango” and / or Spot VIX is at or above a user defined level (otherwise “long”).  Contango is defined as the difference between the front month and spot, but with a little effort the user can easily change the definition to something he or she finds more acceptable – the difference between front and second month for instance.  Or he may wish to build in and adapt the spreadsheet to use moving averages of these prices.

Support is not provided!  Although if you have any real difficulties or spot a mistake feel free to contact me.


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