Disclaimer: The information found on this site is meant for educational and informational purposes only. Nothing on this site should be construed as a recommendation or solicitation to buy or sell derivatives or securities or to trade any particular strategy. Trading of derivatives or securities has large potential risk and you must be aware of and accept all the risks. Past performance of any trading system or methodology is not necessarily indicative of future results. No representation is being made that any account will or is likely to achieve performance results similar to those discussed on this website. Hypothetical or simulated performance results have certain limitations and do not represent actual trading.
Wednesday, May 2, 2012
VXX/VXZ Pairs Trading Strategy with FVE
- 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.