Volatility Strategy

I have decided to create a subscription for my volatility trading strategy.

You can find the subscription link here.

Below are the FAQs for the strategy.

Thank you for visiting. After gauging interest from my readership on my main site (quantstrattrader.wordpress.com), I created this as a subscription page for quantitative investment strategies, with the goal of having subscribers turn their cash into more cash, net of subscription fees (hopefully). The systems I develop come from a background of learning from experienced quantitative trading professionals, and senior researchers at large firms. The current system I initially published a prototype for several years back and watched it being tracked, before finally starting to deploy my own capital earlier this year, and making the most recent modifications even more recently.

And while past performance doesn’t guarantee future results and the past doesn’t repeat itself, it often rhymes, so let’s turn money into more money.

Some FAQs about the strategy:

What is the subscription price for this strategy?

Currently, after gauging interest from readers and doing research based on other sites, the tentative pricing is $50/month. As this strategy builds a track record, that may be subject to change in the future, and notifications will be made in such an event.

What is the description of the strategy?

The strategy is mainly a short volatility system that trades XIV (SVXY as of Feb. 5, 2018–to be appended as of Feb. 27, 2018 as SVXY’s objectives changed), ZIV, VXX, and VXZ (as of a minor modification after Feb. 5). As far as volatility strategies go, it’s fairly conservative in that it uses several different checks in order to ensure a position. The strategy has a conservative and an aggressive variant. The aggressive variant does better when short volatility has a good year, while the conservative variant does better in markets more challenging for short vol. The difference between the two is that the aggressive variant can override the conservative strategy to gain more exposure on the short volatility end if conditions are deemed acceptable.

What is the strategy’s edge?

In two words: risk management. Essentially, there are a few separate criteria to select an investment, and the system spends a not-insignificant time with no exposure when some of these criteria contradict each other. Furthermore, the system uses disciplined methodologies in its construction in order to avoid unnecessary free parameters, and to keep the strategy as parsimonious as possible.

Do you trade your own capital with this strategy?

Yes. The information posted for subscribers are the trades I make. If there is a difference between the conservative and aggressive strategies, my position will be made explicitly clear.

When was the in-sample training period for this system?

A site that no longer updates its blog (volatility made simple) once tracked a more rudimentary strategy that I wrote about several years ago. I was particularly pleased with the results of that vetting, and recently have received input to improve my system to a much greater degree, as well as gained the confidence to invest live capital into it.

About how many trades per year does the system make?

In the backtest from April 20, 2008 through the end of 2016, the conservative system made 187 transactions in XIV (both buy and sell–XIV will be replaced going into March 2018), 160 in ZIV, and 52 (46 in the updated variant of the strategy as of Feb. 5, 2018) in VXX. Meaning over the course of approximately 9 years, there was on average 43 transactions per year. In some cases, this may simply be switching from XIV (to be replaced as of Feb. 5, 2018) to ZIV or vice versa. In other words, trades last approximately a week (some may be longer, some shorter).

When will my trades be posted?

Trades I take will be posted sometime between 10 AM and market close (4 PM EST). In backtesting, they are tested as market on close orders, so individuals assume any risk/reward by executing earlier.

How often is this system in the market?

Deprecated (as of Feb. 5, 2018)
For the conservative system, about 56%. However, over the course of backtesting (and live trading), only about 9% of months have zero return. The aggressive system is in the market a little more, at 62%.

Conservative system: 53%. Aggressive: 63%

What are the distribution of winning, losing, and zero return months?

Deprecated (as of Feb. 5, 2018)
As of late October 2017, there have been about 65% winning months (with an average gain of 12.8%), 26% losing months (with an average loss of 4.9%), and 9% zero months.

As of Feb. 5, 2018, with the system updated to be more conservative on VXX (changes that did not affect past subscriber performance), the statistics are as follows for the backtest:

Conservative: 61% positive, 13% zero, 26% negative.
Aggressive: 64% positive, 8% zero, 28% negative

What are some other statistics about the strategy?

Since 2011:
Returns: 80.5% for conservative, 91.5% for aggressive
Standard deviation: 34.6% conservative, 37.1% aggressive
Sharpe Ratio (assuming 0 return for cash): 2.3 conservative, 2.47 aggressive
Max drawdown: 24.8% conservative, 27.7% aggressive
Calmar Ratio: 3.25 conservative, 3.3 aggressive
Ulcer Performance index: 10.8 conservative, 11.3 aggressive

What are the strategy’s worst drawdowns?

For the conservative strategy, since 2011 (again, around the time of XIV’s inception), the largest drawdown was 24.8%, starting on October 31, 2011, and making a new equity high on January 12, 2012. The longest drawdown started on August 21, 2014 and recovered on April 10, 2015, and lasted for 160 trading days.

For the aggressive strategy, since 2011, the largest drawdown was 27.8%, starting on September 30, 2015, and lasting until January 12, 2016. This was also its longest drawdown, lasting 116 trading days.

What were the annual returns going back as far as possible using synthetic data?
Conservative Aggressive
2008-12-31 2.830020460 2.83002046
2009-12-31 0.763579120 0.76357912
2010-12-31 1.207647432 1.41002198
2011-12-30 1.349208608 1.44623995
2012-12-31 1.405694328 1.84221486
2013-12-31 0.778084014 0.71697775
2014-12-31 0.348382848 0.26124969
2015-12-31 0.465736963 0.30218794
2016-12-30 0.931165492 1.27292592
2017-12-29 0.719792224 1.31126589
2018-02-06 -0.001956361 -0.03121513

The years prior to 2011 seem to have been anomalously positive for the strategy since XIV was not in inception, so I often will choose to look at results from 2011 forward. I am fully aware some strategies that were backtested would have performed disastrously in the financial crisis. Those strategies are obviously not worth investing into.

Will the subscription price change in the future?

If the strategy continues to deliver strong returns, then there may be reason to increase the price so long as the returns bear it out.

Can a modified strategy be provided for those who might not be able to tolerate a 25% drawdown?

A variant of the strategy that targets about half of the annualized standard deviation of the strategy boasts a 40% annualized return for about 12% drawdown since 2011. Overall, this has slightly higher reward to risk statistics, but at the cost of cutting aggregate returns in half. As this requires a weekly percentage-based position sizing element, this strategy is not yet provided.

Can’t XIV have a termination event?

Indeed it did have one on Feb. 5, 2018. The strategy was deliberately out of the market in the days leading up that event. XIV will be replaced with SVXY going forward.

What was the strategy’s worst day?

On September 16, 2016, the strategy lost 16% in one day. This was at the tail end of a stretch of positive days that made about 40%. This is when Kim Jong Un decided to launch a missile.

What are the strategy’s risks?

The first risk is that given that this strategy is naturally biased towards short volatility, that it can have potential for some sharp drawdowns due to the nature of volatility spikes. The other risk is that given that this strategy sometimes spends its time in ZIV, that it will underperform XIV (SVXY after Feb. 5, 2018) on some good days. This second risk is a consequence of additional layers of risk management in the strategy.

How complex is this strategy?

Not overly. It’s only slightly more complex than a basic momentum strategy when counting free parameters, and can be explained in a couple of minutes.

Does this strategy use any complex machine learning methodologies?

No. The data requirements for such algorithms and the noise in the financial world make it very risky to apply these methodologies, and research as of yet did not bear fruit to justify incorporating them.

Will instrument volume ever be a concern (particularly ZIV)?

According to one individual who worked on the creation of the original VXX ETN, new shares of ETNs can be created by the issuer (in ZIV’s case, Credit Suisse) on demand. In short, the concern of volume is more of a concern of the reputability of the person making the request. In other words, it depends on how well the strategy does.

Can the strategy be held liable/accountable/responsible for a subscriber’s loss/drawdown?

Let this serve as a disclaimer: by subscribing, you agree to waive any legal claim against the strategy, or its creator(s) in the event of drawdowns, losses, etc. The subscription is for viewing the output of a program, notably my trades, and this service does not actively manage a penny of subscribers’ actual assets. Subscribers can choose to ignore the information posted at a moment’s notice at their discretion. Again, this is not to be construed as official investment advice–and in fact–explicitly is not. It is purely for educational purposes and should not be thought of as–and in fact is not–official individual instruction to buy or sell. What is posted are the trades I personally take, and this page is filed under an education page. Again, educational purposes only.

Why should information posted to subscribers?

Because my work on other topics has been on full, public display for several years. Unlike other websites, I have shown “bad backtests”, thus breaking the adage of “you’ll never see a bad backtest”. I have shown thoroughness in my research, and the same thoroughness has been applied towards this system as well. Until there is a longer track record such that the system can stand on its own, the trust in the system is the trust in the system’s creator.

Who is the intended audience for this information?

The intended audience is individual, retail investors with a certain risk tolerance, and is priced accordingly.

Isn’t volatility investing very risky?

Archived (as of Feb. 5, 2018)
It’s risky from the perspective of the underlying instrument having the capacity to realize very large drawdowns (greater than 60%, and even greater than 90%). However, from a purely numerical standpoint, the company taking over so much of shopping, Amazon, since inception has had a 37.1% annualized rate of return, a standard deviation of 61.5%, a worst drawdown of 94%, and an Ulcer Performance Index of 0.9. By comparison, XIV, from 2008 (using synthetic data), has had a 35.5% annualized rate of return, a standard deviation of 57.7%, a worst drawdown of 92%, and an Ulcer Performance Index of 0.6. If Amazon is considered a top-notch asset, then from a quantitative comparison, a system looking to capitalize on volatility bets should be viewed from a similar perspective. To be sure, the strategy’s performance vastly outperforms that of buying and holding XIV (which nobody should do). However, the philosophy of volatility products being much riskier than household tech names just does not hold true unless the future wildly differs from the past.

New answer:
Yes. XIV lost more than 90% of its value on Feb. 5, 2018, and had a termination event. Stories abound of individuals that lost anywhere from thousands to millions. However, with an intelligent system, the majority of the most vicious drawdowns can be avoided while retaining a good chunk of the upside.

Is there a possibility for collaborating with other strategy creators?

Feel free to contact me at my email ilya.kipnis@gmail.com to discuss that possibility. I request a daily stream of returns before starting any discussion.

Why Patreon?

Because past all the artsy-craftsy window dressing and interesting choice of vocabulary, Patreon is simply a platform that processes payments and creates a centralized platform from which to post subscription-based content, as opposed to maintaining mailing lists and other technical headaches. Essentially, it’s simply a way to outsource the technical end of running a business, even if the window dressing is a bit unorthodox.