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Wednesday, May 2, 2012

VXX/VXZ Pairs Trading Strategy with FVE

- On my February 22nd post, I illustrated a trading strategy using VIX Futures Term Spreads incorporating the FVE Model.  This time I ran a simulation executing a pairs trade strategy using VXX & VXZ.

- The blue line on the left chart shows the equity graph of the VXX/VXZ pairs trade.  From 2/26/2009 to 5/2/2012 this strategy generated $29,529 in simulated profits.  Annualized return of 32% on a $20k account with max drawdown of 11%.

- The pink line shows the equity graph of a simulated 2nd/3rd month VIX Futures pairs trade.  This generated $54,414 in simulated profits.  Annualized return of 51% but the max drawdown was 32%.  While the VIX Futures pairs trade may appear to be a superior strategy, on a risk adjusted basis, the VXX/VXZ pairs trade strategy beats the former strategy hands down.  Mar ratio (annualized return / max drawdown) for the VXX/VXZ strategy was around 3, compared to 1.6 for the VIX Futures pairs trade strategy.

- I will revisit these two strategies a few months from now to see if they would continue to generate strong (theoretical) profits based on buy/sell signals from my FVE model.

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