Sheet1 has four numerical columns, everything is done in google docs - so all this is very basic. The first contains values for SPVXSP index, which is the underlying index for VXX but without the costs and interest. Their effect is minimal in comparison to volatility of underlying index.
The values for SPVXSP index are in 90K range, that is because the starting value of the index is 100K. It is just a number and really does not matter that is it unusually high. In the second column I calculate simple returns for the index, third I calculate the inverse return by multiplying return by negative one. In the last column I apply inverse returns to get prices, with starting value equals $100. Again, all is very basic.
The table of monthly returns for the simulated index are on Sheet2. You may notice a large difference between simulation and actual XIV performance in the first month - that is only because the dates are different, and actual XIV has one less day than simulated version.
How risky is XIV? I apply bootstrap to monthly returns to find that there is about 60% chance that XIV will be up after one year, and 20% chance that it will more than double in price. This is of course contingent on previous return distribution to be true in the future, which we have no way of knowing. These results are of course excellent. On the downside there is about 12% chance of losing more than 50%, and expected maximum drawdown is 37%.
What is surprising to me is that return distribution is clearly positively skewed despite being a short-vol strategy. If you have any thoughts on this, please share or leave a comment.
Now let me clarify even though I think that XIV is a good product I don't plan on investing in it, because I think for me as a full-time trader it is far better to trade and actively manage risk than it is to buy and hold. You should decide for yourself if the product fits your investment objectives and risk tolerance.
Now let me clarify even though I think that XIV is a good product I don't plan on investing in it, because I think for me as a full-time trader it is far better to trade and actively manage risk than it is to buy and hold. You should decide for yourself if the product fits your investment objectives and risk tolerance.
