Let’s check
what continuous future position on futures on volatility indexes look like.
I used data
from CBOE exchange http://cfe.cboe.com/data/historicaldata.aspx
Since
GVZ/OVX futures are not liquid enough, especially first years right after inception, I used
Settlement price values, they are available for every date. I calculate daily log
returns for closest future contract and sum results cumulatively.
VIX futures
for last years:
GVZ (gold)
futures:
OVX (oil)
futures:
It is
obvious that contango drives futures prices down not only on VIX, but also on
gold/oil volatility. It brings up an idea of a portfolio built with these 3
futures, all in short position, with continuous rebalancing. Another question then
arises: how correlated are volatilities on gold, oil and equities?
problem is not only first year after inception liquidity, but even current one.
ReplyDeleteFor both contracts there are a lot of days when 0 trades occur - actually, in more than 50% of all the days. In the rest there is 1 or slightly more contracts traded on entire day. not sure this provides enough liquidity for anything meaningful, which is pity.
The situation is not so bad. No trades doesn't mean there's no market-maker there. I had couple of trades like year ago on those contracts and when you place order in the middle of the spread or a bit in favor to market-maker, you most probably have a fill. For the kind of strategies with a low turnover like portfolio re-balancing (and not necessary daily) it may be ok.
Deletewell, i would be catious myself to trade anything with low liquidity. In case of liquidity squeeze, and being short the future, you might compromise your entire portfolio with such a big drawdown.
ReplyDeleteAgreed with Jozef, the problem is not to get in but to get out of the market when things don't go your way. Could be scary! Interesting though, thanks.
ReplyDelete