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Strategy 005: VIX Term Structure

Source

Multiple — vol-arbitrage literature 2010s. Notable: Simon (2014), Donninger (2015), the "Hayek" / "Boggs" VIX-term-structure papers. Popularized in retail circles via SVXY / VXX strategies after the 2011 launch of VIX ETPs.

Thesis

The VIX futures term structure (front month vs longer-dated) is usually in contango (longer dates priced higher than front month). This reflects a persistent "fear premium" — investors pay up for longer-dated vol protection.

VIX ETFs that roll futures monthly (VXX) lose money on this roll mechanically: they sell cheap front-month, buy expensive next-month. The mirror image, SVXY (short vol), gains.

When the curve inverts (backwardation) — VIX > VIX3M — it means market is in acute panic; short vol is suddenly very dangerous. That's the exit signal.

Formula

For each trading day: * Get current VIX (^VIX) and VIX 3-month (^VIX3M) * If VIX < VIX3M (contango): allocate 100% to SVXY (short vol) * If VIX > VIX3M (backwardation): allocate 100% to SPY (or cash) * Rebalance daily

Why it might still work

  • The fear premium mechanism is structural — investors will always pay for tail protection
  • Volatility ETPs continue to bleed alpha to short-vol arbitrageurs
  • Curve regime signal is simple and observable

Why it might NOT work

  • The 2018 XIV blowup: SVXY's predecessor (XIV) lost 96% in one day on Feb 5, 2018 when VIX spiked from 17 to 50. The strategy signal kept saying "contango, stay short vol" right up to the moment XIV terminated.
  • SVXY restructured after 2018 to use leveraged (-0.5x) exposure, reducing both upside and downside vs old XIV
  • Curve regime can flip mid-day; daily-close signal lags
  • Sequence of returns matters enormously — even one bad year wipes out a decade

Implementation

  • Universe: just SPY + SVXY + ^VIX + ^VIX3M
  • Rebalance: weekly (daily would be cleaner but our harness doesn't support daily rebalance well, and weekly is a reasonable approximation that captures regime changes)
  • Position: 100% SVXY when VIX < VIX3M, 100% SPY otherwise
  • No leverage, no stops

Data requirements

  • ^VIX and ^VIX3M via yfinance (CBOE indices, free)
  • SVXY price (started Oct 2011, restructured Feb 2018)
  • SPY benchmark

Expected outcome

  • Pre-2018 (XIV era): backtests show +30-50%/yr with brutal tail risk
  • Post-2018 (SVXY -0.5x leverage): more modest, +5-15%/yr
  • 2020 COVID crash: temporary 50%+ drawdown but recovery
  • Real risk: another XIV-style event terminates SVXY (unlikely given its safer construction, but not zero)

Pass/fail criteria

  • Pass: CAGR >= SPY + 3%, max drawdown < 50%
  • Marginal: CAGR within ±2% of SPY (signal is unique, may be worth as diversification)
  • Fail: max drawdown > 60%, OR CAGR < SPY by 3+ pp

On this page

Related

Strategy 002: 12-1 Cross-Sectional Momentum Strategy 009: Insider Cluster Buying Strategy 008: Sell-in-May Calendar Effect Strategy 007: Short-Term Reversal (1-week loser-winner) Strategy 006: Net-Net (Graham Deep Value) Strategy 004: Piotroski F-Score Strategy 003: Post-Earnings Announcement Drift (PEAD) Strategy 001: Magic Formula (Greenblatt)

Source

backtests/docs/005_vix_term_structure.md
updated 2026-05-24 22:59