Validation · #372649 · Volatility
VIX-ETN vol-premium
The Volatility Edge — A Dual Approach for VIX ETNs Trading, 2025
The rule
Harvest the volatility risk premium with short-term VIX-futures ETNs: a dual signal — expected VRP (VIX − 10-day realised vol) and the VIX term-structure slope (VIX vs VIX3M) — sets long-vol / short-vol / cash, sized at VIX/100.
Validated
1.00→1.03
claimed → measured Sharpe
1.03
Measured (daily)matches the paper's convention
0.87
Honest Sharpemonthly, tail-aware
16.9%
CAGR reproducedequity β 0.11 · α t = 3.3
AssetVolatility
StrategyDual-signal short-vol
UniverseVIX short-term futures ETNs
Period2008–2025
Costs5 bps + ETN fee
InstrumentsVXX VIXY XIV SVXY ^VIX ^VIX3M SPYTraded via short-term VIX-futures ETNs. We reconstruct the underlying S&P 500 VIX Short-Term Futures Index from public CBOE VX settlements (the paper used paid Norgate data) — validated against VIXY and the Feb-2018 +97% reference.
The exact rules
| Premium present (eVRP > 0) AND contango (VIX < VIX3M) | → | Short vol — size = VIX/100 |
| Premium gone (eVRP ≤ 0) AND still contango | → | Short vol — half size (0.5 × VIX/100) |
| Premium gone (eVRP ≤ 0) AND backwardation (VIX > VIX3M) | → | Long vol — size = VIX/100 |
| Premium present (eVRP > 0) AND backwardation | → | Cash — step aside |
The backtest, re-run
Inside the model
- Position mix
- 89% short-vol · 7% cash · 4% long-vol
- Avg capital deployed
- 18% (bet size = VIX/100)
- Win rate
- 55% of days · 67% of months
- Skew / kurtosis
- +1.97 / 58 — fat tails, but the big moves are UP (signals flip long-vol in stress)
- Best / worst day
- +20% / −13%
- Best / worst month
- +60% / −8%
- Return concentration
- made in high-premium years (2008 +78%, 2020 +46%); ~flat when calm (2014 +1%, 2024 +2%)
- Recent (decay watch)
- 2024 +2%, 2025 +6% (partial) — possible VRP compression
The validation ladder
| C0 | Replicate | All 4 rule sets match — S1 Sharpe 0.49 vs 0.48 … S4 1.03 vs 1.00, CAGR 16.9% vs 16.3%, MDD −30.9% vs −31%. |
| C1 | Honesty | Add the ~0.95%/yr ETN expense ratio the index backtest omits → net daily Sharpe 1.02 (barely dented). Autocorrelation-honest monthly Sharpe: 0.87. |
| C2 | Deflate | On non-overlapping monthly returns (daily √252 flatters a carry book): survives BHY multiple-testing (t = 3.85) and the Deflated Sharpe — statistically real. |
| C3 | Crisis | Sidestepped Volmageddon (term-structure flattened the book the Friday before). Real max drawdown −30.9% came in COVID-2020 instead; rates-2022 −11%. |
| C5 | Frictions | Cost sweep 0bp → 1.04, 5bp → 1.02, 10bp → 1.00, 20bp → 0.95, 40bp → 0.86 — robust, not a cost mirage. |
| C6 | Decay | IS 1.16 → OOS 0.90 → recent 1.05 — minimal decay (but a 2025 paper has no true post-publication out-of-sample). |
| C7 | Originality | vs SPY: α 15.5%/yr (t = 3.3), β 0.11, R² 0.02 — genuinely uncorrelated. The 'alpha' is the volatility risk premium: real and compensated, not an anomaly. |
ReproducesReal after costsStatistically realCrisis-robustOriginal vs equitiesOut-of-sample proven
How we rebuilt it
- Data
- S&P 500 VIX Short-Term Futures Index reconstructed from public CBOE VX settlements + Yahoo ^VIX/^VIX3M/SPY (paper used paid Norgate ETN data).
- Method
- Dual signal (expected VRP + VIX term-structure slope) → long-vol / short-vol / cash, sized at VIX/100; 3:45pm MOC, ±2% band.
- Universe
- Short-term VIX-futures ETNs (VXX / XIV / SVXY-type), 2008–2025.
- Regime stated
- None — but the term-structure signal is itself the regime filter (it flattened the book before Volmageddon).
Deviations from the paper
- Data: paper's Norgate ETN series (paid) → S&P VIX Short-Term Futures Index reconstructed from public CBOE VX settlements; validated vs VIXY (annual within ~2pp) and Volmageddon (+97% exact).
- Index/NAV (settlement) basis — matches XIV's −96% NAV and Norgate ETN data, not the 3:45pm intraday price.
- C0 at the paper's 5 bps; C1 adds the ~0.95%/yr ETN expense ratio the index backtest omits.
- Sharpe reported daily (1.03) to match the paper; the autocorrelation/tail-honest monthly Sharpe is 0.87 — and the dynamic sizing does NOT beat the fixed-size variant risk-adjusted (S3 monthly 0.92 ≥ S4 0.87), it just adds CAGR + tail.
ProvenanceBeta
- Engine
- v1
- Blocks
- 5 new (vix + vix_futures reconstruction, eVRP, term-structure, banded backtest), 5 reused (metrics, G1/G2, regime, spanning)
- Data
- cboe_vx_recon/sp_st_futures_ER · Jan 2008 – May 2025 · run_id 5
- Source
- CBOE VIX futures settlements ↗ · S&P VIX Futures Index methodology ↗
- Tests
- 21/21 passing · reconstruction known-value + strategy-logic + adversarial-code QA (3 findings fixed)
- Reproduce
- view code ↗
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