Selling VIX Futures and Options for Portfolio Return Enhancement

The term structure of VIX futures is generally upward sloping. The persistent VIX contango may result in abnormally strong performance for VIX futures selling or VIX call writing strategies. However, the high volatility of volatility and significant jump risk may expose short uncovered VIX positions to extreme tail risk.In this paper we consider the performance of VIX futures and call option selling in a portfolio context in 2008 and 2016 as well as over a 10+ year period beginning in 2006. In addition, we consider alternative strategies including VIX futures spread strategies, and the dynamically de-levering VIX futures selling strategies represented by the VPD and VPN indexes. The VPD Index had annual returns that were much higher than those of the S&P 500 Index in 2009 and 2016 (years without large spikes in VIX), but the VPD returns were lower than those of the S&P 500 in 2008 and 2018, years with significant upward spikes in the VIX Index.While the goal of the study is not to make a particular recommendation for a VIX-based investment strategy, meaningful portfolio return enhancements are possible over particular time periods with small allocations to VIX selling. A large allocation to uncovered selling of VIX instruments could have substantial volatility jump risk exposure which can result in economically meaningful and potentially catastrophic losses. However, the VPN Index - which sells VIX futures, holds money market instruments and buys VIX calls – had lower volatility and less severe maximum drawdowns than the stock and commodity benchmark indexes studied in the period of analysis