An Empirical Analysis of the Performance of a VIX Futures Trading Strategy versus a Long Straddle Strategy

This paper examines the performance of two derivative trading strategies related to volatility. The Volatility Index (VIX) has become a popular investment since the inception of its derivatives in 2004 due to its negative correlation to the S&P 500. Current literature comparing the performance of two volatility-mitigating trading strategies is scarce. The aim of this paper is to perform a backtest in order to compare the risk and returns of a long straddle strategy on the S&P 500 against a VIX futures strategy. The study is based on time series data comprising of monthly S&P 500 options and VIX futures, totalling 132 observations between 1st January 2010 to 31st December 2020. The findings of this empirical analysis reveal the option strategy outperformed the VIX futures trading strategy over the period. The accuracy of the VIX in forecasting realized volatility is also investigated within this paper. This study provides investors and researchers with insights into the performance of two strategies commonly used to mitigate against volatility risk