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APPROVEDVolatility Trading Risk Committee · Apr 18, 2026

Volatility Term-Structure Carry v3

Exploits predictable patterns in VIX futures term structure by systematically selling front-month volatility and buying longer-dated contracts when the curve is in contango.

Strategy Score
92

Walk-forward Sharpe 2.31. Holds across 2008/2020 stress windows. Approved for $40M deployment.

Performance Metrics
WF Sharpe
2.31
OOS Sharpe
2.04
DSR
0.91
Regimes
4/5

How It Works

The strategy capitalizes on the volatility risk premium by implementing a dynamic carry trade across the VIX futures term structure.

Mechanics

  1. 1.Monitor VIX futures curve steepness (front month vs 3-6 month contracts)
  2. 2.Enter short front-month / long back-month positions when contango exceeds 15%
  3. 3.Size positions based on realized volatility and market regime indicators
  4. 4.Exit when term structure flattens below 8% or VIX spot exceeds 30
  5. 5.Implement stop-loss at -2% daily portfolio impact

Signals

VIX term structure slope (primary)Realized-implied volatility spreadMarket regime classifier (volatility clustering detector)Cross-asset volatility correlations

Performance Results

Sharpe Ratio
Walk-Forward2.31
Out-of-Sample2.04
In-Sample2.58
Returns
Annualized18.4%
Max Drawdown-8.2%
Calmar Ratio2.24
Consistency
Win Rate64%
Profit Factor2.3
Avg Win/Loss1.2% / -0.9%
Capacity Analysis
Max Capacity
$10,000+
Current Slippage
2bps
At Capacity
8bps

Implementation

Instruments

VIX futures (front month, 3M, 6M), SPY options for hedging

Execution

TWAP execution over 30min windows, split across 3 liquidity venues

Rebalancing

Daily rebalance at 3:45 PM ET, emergency rebalance if VIX spikes >20%

Risk Limits

Max 5% portfolio vol, -15% stop loss, max 200 VX contracts per leg

Technology

Python execution engine, real-time Greeks calculation, IB/TT APIs

Risk Analysis

Volatility Spike

High Impact

Strict position limits, dynamic hedging with SPX puts

Liquidity Crunch

Medium Impact

Staggered execution, avoid front-month expiry week

Regime Change

Medium Impact

Regime classifier reduces size in persistent backwardation

Model Risk

Low Impact

Monthly recalibration, out-of-sample testing protocol

Backtest Results

Period
Jan 2008 - Mar 2026
Total Trades
2,847
Avg Holding
4.2 days
Best / Worst Year
+32.1% (2016) / -4.2% (2020)

Stress Period Analysis

2008 Financial Crisis+8.4%

Strategy profited from elevated vol premium

2020 COVID Crash-4.2%

Initial drawdown, recovered within 3 months

2022 Fed Hikes+14.7%

Consistent performance in rising vol environment

Deployment Status

Status

Live trading since Apr 25, 2026

Allocation

$10,000 (4% of AUM)

Brokers

Interactive Brokers (primary), Tastytrade (backup)

Monitoring

Real-time P&L tracking, hourly risk reports, daily committee review