Market Overview

A volatility index hedging strategy built for this market


Author: Robert Zingale

Covestor model: Volatility Mean Reversion

Currently, short-term VIX futures are experiencing rolling costs (first to second month futures) greater than 10%, which is working in favor of my short position in the iPath S&P 500 VIX Short Term Futures ETN (VXX) position. Therefore, I plan to maintain my current asset allocation strategy of shorting 100% of VXX and going 100% long on the S&P Mid-Term Volatility Index (VXZ) while these rolling costs remain above 6.5%.

However, if current month VIX futures fall to new 52-week lows, I will consider entering a short 100% VXZ position. The reason for this is to reduce price exposure from VIX futures when they are significantly below their mean-reverting level.

I expect rolling costs to remain above 6.5% as investors remain cautious about slowing global economic growth, especially in Europe. Additionally, since equity prices are nearing pre-crisis highs, demand for protective puts will likely remain elevated to preserve portfolio gains. This could put a floor on the level VIX.

This same demand for portfolio protection should also keep VIX futures in a state of contango as investors remain more cautious about next month VIX futures than the current month. However, if the rolling costs fall below 6.5%, I will reduce exposure accordingly. If contango is above 16% before May's future expiration, I plan to short additional VXX to exploit the VIX future's convergence at expiration.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at For information about Covestor and its services, go to or contact Covestor Client Services at (866) 825-3005, x703.

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Posted-In: Markets


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