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I would like to introduce 2-way Volatilty: an Openly Traded Fund
This is not a usual “system”, because the way it trades is completely transparent, similar to ETFs. The full specifications (will) appear in the detailed system description. The $10 fee, is only a ‘convenience’ fee for following it.
A few details: The system trades only once per month. The maximum allowed monthly loss is 15%. The system is designed to benefit from large volatility moves both on the upside and the downside.
Do you have a backtest for the strategy. How would an extended backwardation period for VIX futures affect the strategy?
I’m confused about the 10$ fee.
You wrote in the description…
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Subscription fees: Initial fee is $20. Every 3 months the fee is reset to the 1% “2-way Volatility” value.
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So, if the “2-way Volatility” model account value is at 25000$,
are you going to charge 250$ soon?
I was thinking approximately 1% per year (which is similar to what volatility ETFs charge). I have now fixed this to 0.1% per month. Thank you for catching it.
UVXY options have not been around for too long, so there is very limited data to use for back-testing.
However, I did do some approximate calculations using a fixed (but somewhat high) premium for the UVXY calls, using the actual VXX data, since VXX inception. The return was comparable to that of (simulated) XIV for the same period. But obviously the curve was different, much smoother, benefiting from volatility events.
It would be difficult though to predict how this would behave during prolonged backwardation periods, since these are so rare and they can be very different from the past.
Since the strategy trades once monthly, I decided to keep track of its performance in this thread.
During the first cycle:
The value of the account was 25K at open. So, excluding fees, the system returned 2.8%, with a drawdown of about 6%. The statistics currently shown by C2 are not correct due to the UVXY reverse split, but hopefully this will be fixed soon.
So, effectively, the UVXY short paid (and won some extra), for UVXY calls 30% out of the money, for an amount equal to 50% of the account. That is exactly the nice feature of the system. It can generate nice returns, with bounded monthly drawdowns, and a huge upside in the case of volatility events. For instance, in the hypothetical case that VIX rises to 20 within a month, the system could have returned 100% or more within the same month.
The system is openly traded, the details can be found in its description. It should be a nice complement to other volatility systems, and is also ‘adjustable’ by manually increasing the amount of UVXY short. The fee is $10 just for the convenience of following.
It’s going to be interesting to see what happens when the call premiums normalize, it seems to me the bet here is that the call premiums are too cheap which I would think is unusual for any length of time for OTM volatility calls, but we live in interesting times right now (since the election especially) in terms of these things.
I am not sure if call premiums can be considered cheap. I would think that the OTM call premium should be linked to the contango size. So, as long as VIX doesn’t move, the gains from contango should be able to pay for much of the premium (and more, for contango <15%). If the VIX changes regime via a sudden move, then the calls will pay well, or in the worst case the system will suffer a short time loss. So, the bet is that VIX will not do a slow grind higher.
