Abstract
Understanding the behavior of the VIX and developing trading strategies for VIX related products is the leitmotif of the Sibyl-Working papers. In the previous papers a signal based approach was used. These strategies are the cash cows of the Sibyl-Fund. This working paper develops first a mean-reverting logarithmic model for the VIX. In the next step the relation between the VIX and VIX Futures is modeled. VIX Options are evaluated by Monte-Carlo Simulation of Option-Trading Strategies. The model is also applied to the VIX based ETN VXX and VXX Options and extended to the VSTOXX and VSTOXX Futures.The performance of several model-based trading strategies is backtested. The paper presents not only good but also bad or dubious trading ideas. The signal based strategies exploit the term-structure of VIX Futures. The model exploits additionally the mean-reversion of volatility. This improves – at least in the backtest – the performance. The paper discusses in appendix B the critique on the backtest methodology formulated in the paper Pseudo-Mathematics and Financial Charlatanism. The (well known) critique has to be taken serious, but the suggested solution is of no practical use.Version 1 adds a completely different VXX trading strategy which was suggested by a reviewer.
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