Strategy in a nutshell. I really don't have the time to write a formal article, but want to share the findings.
Note: I used simulated SVXY from VIX futures.
First create optimal SVXY investment strategy alone (call it S).
Step 1. Define R = average(F1/V,F2/F1) - 1 where
V = VIX
F1 = first month future
F2 = second month future
Step 2. Calculate average R from inception to date
Step 3. Invest in SVXY if current R > -1 * average historical R, invest in UVXY otherwise
The historical value of R is currently 4.8%. It has bounced quite a bit, going as low as 3.4% and as high as 11.3%.
Average annual return of strategy S from 2004 to 2014 is ~100% compared to ~35% for holding SVXY alone. You are invested in UVXY 6% of the time and in SVXY 94% of the time.
But still deep max drawdowns exist e.g., -85%+ in 2007 to 2008 during the market crash. In the same period SVXY crashed by 90%.
So we need to do better. Doubling money each year is good but drawdowns are scary.
Now, in comes options. Call this strategy SO (S above, plus options)
On each January, buy one year SVXY puts with strike 30% out of money, and one year SVXY calls with strike 40% out of money. Put 12.5% of entire portfolio in puts, 37.5% in calls, and the remaining in the strategy S as above.
Average annual return of strategy SO from Jan 2005 to Jan 2014 is ~170%. Max annual drawdown is -28%. Strategy returns by year
So only two down years and some massive up years.
That's all folks!
Disclosure: The author is long SVXY.