Macro Risk Advisors Reveals the ‘Best’ Short-Volatility Strategy

Short-volatility strategies have been all the rage lately, with the Cboe Volatility Index, or VIX, so low for so long.

Even though the VIX didn’t go much lower in 2017, it was possible to make money with shorts by profiting from carry, or options decay and rolldown, Macro Risk Advisors said. The firm has been seeing more interest from clients in adding a short volatility overlay, “either to help offset the decay of hedges, or simply to make money.”

The firm concluded that the best short-volatility strategy was “probably a combination of short VXX/long XIV and VXX puts plus put spreads of different maturities,” MRA’s Pravit Chintawongvanich wrote in a Jan. 5 note. VXX is an exchange-traded note with the VIX as its underlying index, while the XIV is an ETN based on the inverse performance of the VIX. Since June 2010, the strategy would have posted annualized returns of 7 percent and a maximum drawdown of 7.5 percent, MRA said.

MRA’s constraints in its analysis were to participate in the VXX rolldown and earn carry, and not to lose more than 10 percent in a year. The firm looked at shorting VXX, buying XIV, and buying VXX puts and put spreads of various maturities.

“Even if we don’t think the VIX can go much lower at an 8 handle, the VIX futures curve can stay steep,” Chintawongvanich wrote, “meaning short volatility strategies can keep working.”

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