Goldman Explains How Traders Made 4,364% Since 2009 With This 'Simple' Strategy

Tyler Durden's picture

This is too easy. Forget NFLX Calls. As Goldman explains, the road to real riches over the past 8 years (off the '666' lows in the S&P) is simple - Sell Vol!

The S&P 500 VIX Short-Term Futures Daily Inverse Index which tracks the return of being short a one-month VIX future was up 4364% from March 9, 2009 through 1Q 2017.

Policy uncertainty is elevated around the globe and yet the VIX has posted one of its lowest starts to a calendar year on record. Many investors want to get long volatility via VIX ETPs. But buyer beware. Not a single VIX ETP actually tracks the VIX. They track VIX futures and the performance differential can be large. In our view it is important to understand how VIX ETPs are constructed, key return drivers and historical performance across bull, bear, and boring markets before trading.

VIX ETPs have almost $4 billion in assets under management.

And Open Interest has grown dramatically.

Trading: VIX ETPs are benchmarked to VIX futures; not the VIX

In our client discussions the number one misunderstanding regarding VIX ETPs is the simple fact that not a single VIX ETP is actually benchmarked to the VIX. What actually trades? Most VIX ETPs are benchmarked to indices constructed by S&P Dow Jones Indices and track the daily return on a constant maturity one-month or five-month VIX future. In practice, this typically involves the daily rebalancing of two-to-four VIX futures contracts depending upon the target maturity.

VIX ETP performance

Long vol performance: Strong gains during market shocks; difficult to buy and hold. Many VIX ETPs track variations of the S&P 500 VIX Short-Term Futures Index which measures the performance of a constant maturity one-month VIX future. That benchmark index is down 99.9% since December 2005, equating to an annualized return of -46.1% over the period. Its double-levered counterpart has had a median loss of -1.2% per day; -14.5% per month and an annualized return of -80.7% back to 2005 (Double-levered long: From 100,000 to under a penny since 2005).

Timely hedges have performed very well: While long vol strategies have been tough to hold for long periods of time; timely hedges can perform very well. We estimate that the S&P 500 has dropped by an average of 9% across the top ten calendar-month declines back to December 2005. One-month VIX strategies were up in each of the ten months by an average of +37.3%.

Short volatility performance: It stands to reason that if being long volatility has done poorly over time then the short has done well. The XIV and SVXY should have daily returns similar to the S&P 500 VIX Short-Term Futures Daily Inverse Index (SPVXSPI) which tracks the returns from selling a constant maturity 1m VIX future. The SPVXSPI was up 4364% from March 9, 2009 – March 31, 2017. The S&P 500 was up 249% over the same window. The inverse index has had an annualized return of 21.5% since December 20, 2005. The S&P 500 VIX Short-Term Futures Daily Inverse Index, which tracks the return of being short a one-month VIX future, was up 4364% from the market bottom on March 9, 2009 through the end of the first quarter of 2017. The index has had a median daily return of 0.6% and an annualized return of 21.5% since December 2005.

The best of times for short volatility: After vol spikes and slow markets with low realized volatility. Being short volatility often performs well after market shocks as volatility mean reverts and over periods of persistently low volatility and stable market returns. Exhibit 6 shows that the top 10 calendar month gains in the S&P 500 immediately followed many of the largest down moves. The S&P 500 gained 7.9% on average versus 21.6% on the 1m -1x index.

The worst of times for short volatility: Market shocks. Being short volatility can generate high returns but it can also suffer severe drawdowns. The index has shown a positive correlation of 0.82 and a beta of 4.3 to daily S&P 500 returns since 2013. The high beta means that drawdowns can be large when the market is down and the 1m -1x index was down -71.4% in 2008 and -45.5% in 2011. The worst calendar month for the strategy occurred in October 2008 when the S&P was down -16.9% but the 1m -1x index dropped -58.7%. The worst calendar day for the 1m -1x index occurred on June 24, 2016 (Brexit): The index was down 32.7% versus the S&P 500 down 3.6%.

Contango: Why long VIX ETP performance has been so poor

The VIX curve is said to be in contango when VIX futures are trading at higher levels than the VIX. The VIX curve has been in contango 70% of the time back to December 2005. ETPs which track one-month VIX futures strategies have lost an average of 83 basis points per day when the VIX curve has been in contango. That is not a fluke. We provide a quick mathematical illustration that contango leads to negative performance for long vol VIX ETPs all else equal.

VIX ETP scenario analysis: VXX returns if the VIX stays where it is We outline the methodology used to create many VIX ETPs. Once you understand the methodology, some simple, yet powerful, questions can be answered. For example, what are the potential returns on a VIX ETP over the next month if the VIX stays where it is and futures roll down the curve? The answer depends upon both the level and the term structure of implied volatility.

Compounding: A short is not the mirror image of a long

Most VIX ETPs are rebalanced daily, which means they track the one-day return of an index. By construction, that means that a long and a short can track their respective benchmarks perfectly each day but they may not be mirror images of each other over longer holding periods due to the compounding of returns. August of 2015 was an interesting example in a tough market. The benchmark for a one-month VIX futures strategy was up 71%, the inverse was down 48% and the double-levered was up 170%.

*  *  *

So that's it America. Easy! Instead of buy-and-hold, it's sell-vol-and-roll - what could possibly go wrong?

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Bryan's picture

"Sell Vol" works great when you can manipulate Vol at will.  Sure.  It's called "cheating" in most other businesses.

LawsofPhysics's picture

^^^this, not to mention access to all the free money (ZIRP/NIRP) that you want with NO real RISK or no real WORK...

ParkAveFlasher's picture

I think this does sound easy.  I'm gonna open me up an investment vee-hickle.

Four chan's picture

when the jew in charge says sell vol, you better be buying the fuck out of vol.

TwelveOhOne's picture

This sounds like the "one weird trick" marketing technique.  GraveDancer is making over $7k per week, from his underwear, spamming Xythras links!

manofthenorth's picture
Goldman Explains How Traders Made 4,364% Since 2009 With This 'Simple' Strategy

We own the FED....

We own the Treasury...

We own your Legislators.......

We own the regulators.......

We own your Courts......

We own your Money........

We own the Police.......

We own the Media.......

We own EVERYTHING that matters.....

We own you suckers !!!!!!!

Miss the dip ??? Feeling down ??





AWESOME !!!!!!!!!

except barbarous relics, what fool would collect shiny rocks ???

leavelawbehind's picture

If this is not a rigged market, what is?

VIX not discovering it's proper value? That's just like subprimes in "The Big Short" movie. That some ethnic-religious entity can singlehandedly defy the laws of economics is just mind boggling....

HRClinton's picture

Isn't it great when you can create money out of thin air, and make or bypass the rules that will?

It's great to be chosen and doing God's work!

Tip to all the losers: Pick or invent the god who will back you and your schemes. It worked for the banking tribe. Praise be to Mammon!

shizzledizzle's picture

The top is in. Any time the big guys (GS) are telling you the what they have done to make absurd profits you can be sure they are changing their direction. 

HooRAY4rSIDE's picture

Yeah, I'm sure they'll be 'selling a lot of volume' on the way down to help hit those puts.

Sky flyer's picture

I'm not a rich man. My hope is they keep pounding silver down until its $1 fiat an ounce and I'll sell everything I own to load up. Keep slamming that monkey hammer you sick banker fuckers.

TabakLover's picture

I bought some phyzz AG today. Gift for a freind's newborn.

Agent P's picture

aka...TVIX the Muppets! 

quadraspleen's picture

You lost me at 'Goldman explains...'

LawsofPhysics's picture

LOL!!!  no mention of their access to FREE MONEY (ZIRP/NIRP)?

Not to mention the fees they charge for all the "work" involved with pushing fucking paper/digits around....

Fuck em, such "let the majority eat cake" monetary experiments have been tried before, get long sharecropping and guillotines,  beat the rush!

Blankenstein's picture

No mention of their early access to the FOMC minutes

"Fed Releases Names Of Early FOMC Minutes Recipients: Include Employees Of ECB, Goldman, Barclays, JPM, Law And PE Firms"

GRDguy's picture

GS shills, same as house shills in Las Vegas.

Fancier offices, though.

BigFatUglyBubble's picture

House shills in casino?  I always suspected rigging, but I wasn't aware of this phenomenon.  What do they do?  Drive up bets higher?

I have observed several times where dealers "forget" to payout, especially when the player is tipsy.

MAAAHM's picture

And you have to watch your back if you win too much

uno's picture

at least Las Vegas has to provide an actual service, hotel rooms, entertainment, services, prostitutes, buffets etc.  You can see something.  

GS is the biggest leach on this planet 

Snaffew's picture

VIX down to doesn't get much lower....a break into the 9's should signal a short term top at the very least.  maybe they break the rules and take the Vix to the 8's...i wouldn't put it past these bastards.  C'mon Kim...light a couple candles to celebrate!

mily's picture

Actually, VIX was at 10.22 premarket. Been buying VIX @11 calls today, hedged with some puts on VXX 

TheNuclearGenie's picture

Selling vol has been a great strategy indeed! Too bad I did not participate in that trade. I have been long the markets since 2009-2010 and the returns have been phenomenal. I urge zerohedgers to stop being pessimistic and start saving in the US stock markets. It is never too late!

coast1's picture

The day I start investing in the stock market it the day it will start going down....

daveO's picture

Obviously, the cycle rules no longer apply to these markets. The banksters have been printing like there's no tomorrow since 2009 for one simple reason, there is no tomorrow for them. They have saturated the economy with too much debt and they know it. Maybe they can take the VIX down to zero, so long as the rest of the world continues to accept dollars. At some point, it will require too many wars on too many fronts to support the dollar.

City_Of_Champyinz's picture

Until the day it is too late...By all means you should buy the market at the all time highs, what could possibly go wrong?

ebworthen's picture

"VIX Short-Term Futures Daily Inverse Index" - so an inverse index of an index of a future.

"30-1 on double sixes, I feel lucky!"  Stay out of the Casino kids, the house always wins.

Falconsixone's picture

But can they start a fire with two sticks?

10flippers's picture

so the spread between VIX ETFs and VIX futures could blow out if ETFs aren't able to adequately hedge. hmmm


what do ETFs do over risky weekends? surely possible there could be big gap opens.


can an ETF go busto?

pebblewriter's picture

VIX's manipulation is getting worse by the day.  Between 2014 and 2016, it tagged long-term support three times.  Since December 2016, it's tagged it or dropped below it 27 times -- about one out of every four sessions.

willy up the creek's picture

I have a question for those of you who think that jews control everything or something like that.  Something that's kind of been nagging at me as I read all your comments.  Does anyone doubt that jews own a lot of gold?  I don't think so.  And, I don't say that at all disparagingly.  Au contraire.  So, if that's so, why then don't they push the price of gold to the sky?  What's your answer to that?     

daveO's picture

The FED's money spigot is infinite, gold is not. There's more to be made by suppressing gold prices and pumping fraudulent fiat into the economy, much more. Gold is the long-term fall back for when the dollar is rejected.

. . . _ _ _ . . .'s picture

Technically, the US dollar isn't really fiat as it is backed by other people's oil (petro-dollars.) It is, therefore, not infinite.

But it is treated as though it is, like other people's oil.

If owning gold is like shorting the Fed, the value of gold in dollars is irrelevant because if gold goes from $1000 to $5000, the dollar will be worth 1/5th.

Gold has value in its own right, which is not dependant on currencies.

Trading gold for oil is another thing. Gold can be recycled ad infinitum. Oil is burned, and so goes up in value relative to gold, due to scarcity. But gold is easier to buy bread and ammo with than oil.