Trading volatility abasic vxx strategy

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Trading volatility abasic vxx strategyTrading Volatility: A Basic VXX Strategy

The continually evolving ETF and ETN marketplace has made it incredibly easy for the average retail trader to have access to plenty of different markets that used to be reserved for professional traders. With that new availability has come a large influx of strategies and ideas for quantitative approaches to these markets.

The creation of the VXX ETN has provided retail traders the ability to trade market volatility. Traders who used to simply use the VIX as a general market indicator are now able to actually trade that indicator.

The VXX makes trading volatility an option for retail traders. Jay Wolberg gives us a unique idea for a trading strategy.

Jay Wolberg from Trading Volatility published a strategy for trading the VXX based on signals from the VXX Weekly Roll Yield (WRY) and its 10-day simple moving average.

The rules for this idea are extremely simple:

There are two halves of this trading strategy:

1) being short VXX/UVXY (or long XIV/SVXY) whenever the WRY is below its moving average, and

2) being long VXX/UVXY (or short XIV) whenever the WRY is above its moving average.

He provides us with his backtesting parameters:

Ive backtested the strategies separately for short VXX only and long VXX only from the inception of VXX (1/30/2009) through 12/10/2013.

Decision points are made using the days closing data (individual trades in the analysis can be viewed here ).

Jays short side returns look very promising:

For short VXX only:

# of Gains: 59

# of Losses: 47

Avg Return: +4.1%

Max Gain: +40.4%

Max Loss: -19.2%

Sum of Gains Losses: +438.6%

But his long side returns arent profitable:

For long VXX only:

# of Gains: 32

# of Losses: 74

Avg Return: -0.8%

Max Gain: +60.6%

Max Loss: -17.4%

Sum of Gains Losses: -81.9%

As you can see, the short side of this strategy appears to have an edge, but the long side doesnt quite stack up. Jay continues by providing histograms that report the returns of individual trades.

He also suggests that many of the long side trades started out profitable, but then gave back their gains and turned into slight losses. His theory is that implementing a trailing stop would have protected those profits and rendered a successful long side strategy.

In addition to adding trailing stops, I would also be curious to see how adding a long term trend filter would impact the returns. I wonder how many of his losing trades took place on the wrong side of the 100 or 200-day simple moving average.

Once again, we have a strategy that could be developed into something unique and profitable. However, at this point it is basically just an interesting idea.