Day Trading System in VIX Futures – JonathanKinlay.com

This is a follow up to my earlier post on a Calendar Spread Strategy in VIX Futures (more information on calendar spreads ).

The strategy trades the front two months in the CFE VIX futures contract, generating an annual profit of around $25,000 per spread.

DAY TRADING SYSTEM
I built an equivalent day trading system in VIX futures in Trading Technologies visual ADL language, using 1-min bar data for 2010, and tested the system out-of-sample in 2011-2014. (for more information on X-Trader/ ADL go here).

The annual net PL is around $20,000 per spread, with a win rate of 67%.   On the downside, the profit factor is rather low and the average trade is barely 1/10 of a tick). Note that this is net of Bid-Ask spread of 0.05 ($50) and commission/transaction costs of $20 per round turn.  These cost assumptions are reasonable for online trading at many brokerage firms.

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However, the strategy requires you to work the spread to enter passively (thereby reducing the cost of entry).  This is usually only feasible on a  platform suitable for a high frequency trading, where you can assume that your orders have acceptable priority in the limit order queue.  This will result in a reasonable proportion of your passive bids and offers will be executed.  Typically the spread trade is held throughout the session, exiting on close (since this is a day trading system).

Overall, while the trading system characteristics are reasonable, the spread strategy is better suited to longer (i.e. overnight) holding periods, since the VIX futures market is not the most liquid and the tick value is large.  We’ll take a look at other day trading strategies in more liquid products, like the S&P 500 e-mini futures, for example, in another post.

High Freq Strategy Equity Curve(click to enlarge)

 

High Frequency Perf Results

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A Calendar Spread Strategy in VIX Futures

I have been working on developing some high frequency spread strategies using Trading Technologies’ Algo Strategy Engine, which is extremely impressive (more on this in a later post).  I decided to take a time out to experiment with a slower version of one of the trades, a calendar spread in VIX futures that trades  the spread on the front two contracts.  The strategy applies a variety of trend-following and mean-reversion indicators to trade the spread on a daily basis.

Modeling a spread strategy on a retail platform like Interactivebrokers or TradeStation is extremely challenging, due to the limitations of the platform and the Easylanguage programming language compared to professional platforms that are built for purpose, like TT’s XTrader and development tools like ADL.  If you backtest strategies based on signals generated from the spread calculated using the last traded prices in the two securities, you will almost certainly see “phantom trades” – trades that could not be executed at the indicated spread price (for example, because both contracts last traded on the same side of the bid/ask spread).   You also can’t easily simulate passive entry or exit strategies, which typically constrains you to using market orders for both legs, in and out of the spread.  On the other hand, while using market orders would almost certainly be prohibitively expensive in a high frequency or daytrading context, in a low-frequency scenario the higher transaction costs entailed in aggressive entries and exits are typically amortized over far longer time frames.

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In the following example I have allowed transaction costs of $100 per round turn and slippage of $0.1 (equivalent to $100) per spread.  Daily settlement prices from Mar 2004 to June 2010 were used to fit the model, which was tested out of sample in the period July 2010 to June 2014. Results are summarized in the chart and table below.

Even burdened with significant transaction cost assumptions the strategy performance looks impressive on several counts, notably a profit factor in excess of 300, a win rate of over 90% and a Sortino Ratio of over 6.  These features of the strategy prove robust (and even increase) during the four year out-of-sample period, although the annual net profit per spread declines to around $8,500, from $36,600 for the in-sample period.  Even so, this being a straightforward calendar spread, it should be possible to trade the strategy in size at relative modest margin cost, making the strategy return highly attractive.

Equity Curve

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Performance Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(click to enlarge)