Strategies · Library · Volatility
§7.3Carry
Volatility carry with two ETNs
Short a short-dated volatility note and buy a medium-dated one in a ratio from past data. The short-dated note tends to bleed value because the curve usually slopes up; the long leg softens spikes.
- Asset class
- Volatility
- Held for
- Months
- Data
- ARCANE has the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Relative decay of a front-heavy volatility product against a longer-dated one.
- Entry and exit
- Open the pair and rebalance on a regular schedule; hedge ratio re-estimated from a rolling regression of returns.
- Sizing
- Hedge ratio from regression of one leg on the other.
How it fails
- Sharp spikes in the short leg
- Product changes or closures
- Borrow costs on the short
Data it needs
- VXX daily closes
- VXZ daily closes
VXX/VIXY and similar products are quoted; the exact paired product may be thin or delisted.
How ARCANE uses it
Could inform a Call that volatility products drift lower in calm markets, paper only.
The core is a short position, which a long-only builder cannot hold.
Filed under the carry card
Own what pays more than it costs to finance (the return if prices stand still) and sell what pays less, across currencies, bonds, commodities and stock indexes.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §7.3, p. 83 of the SSRN version. Described in our words. Carry is ARCANE’s filing, not the book’s.