This segment reveals the results of a study to determine if going long the VIX, which, over the long term, is mean reverting, can be profitable.
Over the long term implied volatility is mean-reverting.This makes buying and holding implied volatility when it is low an enticing strategy at first thought. The problem is that volatility products have a cost of carry when the VIX futures are in contango.
A chart showed higher VIX future prices as one moves further out in time. This is an indication of the market pricing in the likelihood of higher volatility in the future and is called contango. Backwardation is the opposite and is when futures are cheaper into the future. That will likely happen most frequently after a volatility spike since volatility is mean reverting.
The prices of the contracts will decrease in price and “slide down the curve” over time if market conditions remain stable when VIX futures are in contango, . Those who are long the VIX will lose. Our calculation showed that from February 2009 to the present the VIX was in contango 88% of the time.
We measured VXX performance over each 30, 45, and 60 day period over the past 6 years to quantify this. Going one step further, we observed how VXX performs in periods of contango in the VIX futures. Finally, we looked at the average performance of VXX over the periods of time in which contango lasted for more than 30 days:
Watch this segment of "Market Measures" with Tom Sosnoff and Tony Battista for the takeaways and to see what the hard data shows about buying volatility over the long term.
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