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windwine
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A researcher in a financial institution.
  • Intraday Vs Overnight Profit For XIV Part II 0 comments
    Sep 26, 2013 7:45 PM | about stocks: XIV

    Following the previous discussion on XIV intraday and overnight returns, we have seen during the past 3 years most of the gains in XIV are coming from overnight returns. It is understandable since when people are talking about XIV they are attracted by the profit from contango which literally is the overnight rolling yield.

    In this post we will revisit the intraday/overnight return profiles conditioning on certain market indicators.

    1. Conditioning on the previous day's VIX close value<20. It is a simple idea based on the fact that most people would treat VIX of 20 as a warning signal. I picked up 20 arbitrarily and people can explore the mean/median of historical VIX levels.

    To be more precise we are looking at the overnight return from day i to day i+1 if the close value of VIX is <20 on day i and the intraday return in day i+1 if the close value of VIX is <20 on day i.

    (click to enlarge)

    It is still highly skewed but the average return increased from 0.07684657% to 0.1264243%.

    (click to enlarge)

    For the overnight returns it is still very symmetric and the average return increased from 0.2469942 % to 0.56952%. The average return is phenomenal for such a simple strategy and it confirms the attractiveness of XIV during market tranquility.

    similarly, I have repeated the same calculation conditioning on VIX>=20 and the results below demonstrate that it is better stay away from XIV when VIX is high.

    (click to enlarge)

    The average return is -0.06788977%. You are not expected to make money although you might be lucky to hit a 12% return.

    (click to enlarge)

    The average return drops dramatically to -0.6817747%. Therefore, when VIX is high please do not play contrarian on XIV. That would be just like Metallica's lyric " Fight fire with fire. Ending is near. Fight fire with fire. Bursting with fear. We all shall die"

    2. Condition on contango/backwardation based on VIX/VXV<1.

    To be more precise we are looking at the overnight return from day i to day i+1 if the close value of VIX/VXV is <1 on day i and the intraday return in day i+1 if the close value of VIX/VXV is <1 on day i.

    (click to enlarge)

    It is still highly skewed but the average return further increased to 0.15916%.

    (click to enlarge)

    For the overnight the average return is 0.4689666% which is smaller than conditioning simply on VIX level. Nevertheless, it is much higher than blindly holding XIV overnight.

    Similarly we look at the return profile when VIX/VXV>=1.

    (click to enlarge)

    The average return becomes a very negative -0.9407997% .

    (click to enlarge)

    The average return becomes -2.324481% and the profile is very symmetric. Definitely backwardation is at work.

    Conclusion:

    Simple market indicators like VIX and VIX/VXV ratio contains great information for XIV returns. Even simple buy close sell open strategy can be successful if combined with such indicators.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: XIV
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