Volatility Trading Analysis with Python Section 3: Futures Trading Strategies EXFINSIS wwewcatins.comCourse Disclaimer Course Objective. The course hasan educational andinfomational purpare andl dooin’? consule ay type. radng or invertmentodvice Al content cluding code onl data presented sh no guarantee of sxacinest& competent Investment Rsk and Uncertainty. I course content and conclusions are based on hypothetical storical back tesing and fof eal trading with the possbiy of fur euler net previous cbservadvithn thave le sree. Post peformanee doesn't ‘Guatentos uturorotums,nvesimontsk and uncortanly con possly load fs falls for uloveragad produc and even Ierger for everaged ones Responsibity Disclaimer. Ine istctrisnatresponible for ony damages cared by ving courte content for rang or Invasiment dections exchsvelWarsloring al is ospondbly fe the sudan. 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Therefore theyre cri stable fr occreded crsophcated rvestons wh ‘eperence h tnonclal devvatveses part a @ wel dvetsind porfolo.Consequeny recommending user does Own ue ‘Sigence regarding poperion of porto to locate and const a ceed france oxwrcr before fNgony lies oF ‘options related racing or nvesiment decsion. EXFINSIS. © Diego Feméndez Garcia 2015-2017 ‘www oxtinggscomFutures Trading Strategies + Futures trading strategies consist of implementing volatility hedge cnc volatility tail hedge methodologies by evaluating risk adjusted performance of associated benchmark Indexes replicatinginvestment vehicles such os exchange traded funds + Exchange traded funds ETFs are collectiveschemes that followcertain asset allocation Investment strategy with a structure similar to stocks in which owners have participation in underlying assets. EXFINSIS f= © Diego Feménder Gorcie 2015-2017 wwwexinss.com «Futures Futures cre exchange traded standardized contracts in which buyers and sellers agree forward price and delivery date of underlying asset. They are related fo forwards contracts but have tworelevant differences. First, futures are ‘exchange traded standardized contracts while forwards ore overtne counter customized contracts. And second, exchange requires futures have clearing margin as customer safeguard which lowers their credit risk, eltoe EXFINSIS. Diego Femandez Garces 2015-2017 ‘wewicexiinss.corVolatility and Assets Returns Correlation Volatility and assets returns correlation measures the degree to which theymove together taking into account their standard deviation. pWIX,,SPX,) (VIX) +E (SPX,))* EXFINSIS f= © Diego Feménder Gorcie. 2015-2017 wwwexinss.com «Volatility Risk Premium + Volatility risk premium consists of the difference betweenimplied and historical or realized volafilty, VRP, =VIX¢-01~ 0 : i 5 EXFINSIS. ego Feménder Garcia 2015-2017 wonvextsVolatility Term Structure + Volatiity term structure consists of the difference between shorter and longer term implied volatility tutures. Term structure contango consists of longer term implied volattlity futures being higher than shorter term ones while backwardation consists of the opposite, VIS, = VIX, ~ UID, : i EXFINSIS. Diego Feménder Gorcia 2015-2017 wun ext orVolatility Skew Volatility skew consists of the cifference between options implied volatilities at different strike prices. © Volatiity smile is when both out of the money call and put options implied volatiles are increasingly higher than at the money ones. © Volatility skew or smirk is when out of the money put optionsimplied volatilities are increasingly higher than at the money ones while out of the money call options ones: remain similar. An estimation example includes CBOE SKEW Index® which measures 30 day annualized expected tailrisk of S&P 500 index SPX. Chicago Board Options xchange CBOES. "The CBOE Skew Index SKEWA” 2010. EXFINSIS. © Diewo Fernandez Garcia 2015-2017 wwwrextinggcomVolatility Skew + Ithas following interpretation. SKEW = 100 = SPX Normal Log Returns + Find belowestimated risk adjusted probability of a two and three standard deviations S&P 50030 day log retums. SKEW = 100,20 = 2.30%, 30 = 0.15% SKEW = 125,20 = 9.05%, 30 = 1.63% SKEW = 145,20 = 14.45%, 30 = 2.81% : i 5 EXFINSIS. Dievo Feménder Gorcia 2015-2017 wonvextsFutures Payoff + Futures payoff consists of the difference between asset price at maturityand future agreed delivery price depending on whether position s long or short. This result then. Reeds to be multipied by contract size or multiplier, Return on investment consists of dividing future payoff by amount originally invested. Amount originally invested consists of contract being perialy orfuly colicierclzed: and i fully colaterelzedby how many imes. + It's calculatedas follows. Long fy = (Se fx) * fm Short fy = U(61— fx) * fm sects 21 Fad Fe EXFINSIS. "= © Diego Fernandez Garcia 2015-2017 wonuexTinsi.com «Volatility Risk Assessment Volatility risk assessment consists of evaluating historical or realized volatility monthly differences probability distribution against c normal probability distribution. Ae Normal @-@ Plot consists of comparing ranked standardizedhistorical or realized volatilty monthly differences sample quartiles to comesponcing ranks inverse normal distribution theoretical quartiles. 0 = Hae EXFINSIS, © Diego Feménder Garcia 2015-2017 wwwcextnss.com «Strategies Performance Comparison + Strategies performance comparison is done by using asset buy and hold strategy os benchmark against volatility tracing strategies. Annualized return, annualized standard deviation, annualized Sharpe ratio, returns skewness cnc retumns excess kurtosis metrics ‘are used for this assessment. + Annualized return is a performance metric that consists of the number of observations root of annually scaled cumulative product of daily retums. zy or Peay Pea EXFINSIS f= © Diego Feménder Gorcie 2015-2017 wwwexinss.com «Strategies Performance Comparison + Annualized standard deviation Is a risk metric that consists of historical volatiity multiplied, by square root of number of periods per year. Oa = Occ * VISE + Annualized Sharpe ratio Is o risk-adjusted performance metric that consists of annualized excess return by unit of risk. vha a EXFINSIS. = @ Diego Ferndinder Garcia 2015-2017 wowivextinss,comStrategies Performance Comparison + Returns skewness is a distribution metric that consists of measuring daily retumns probability distribution asymmetry form their arithmetic mean. ©. Positive skew indicates daily returns probability distribution with asymmetric tail ‘extending towards positive values. 2 Negative skew indicates dally retums probability distribution with asymmetric tall extending towards negative values. EXFINSIS = © Diego Femandez Garcia 2015-2017 wwewcatins.comStrategies Performance Comparison + Returns excess kurtosis isc cistribution metric that consists of measuring daily retums probability distribution peakedness or flatness compared witha normal probability distribution. © Positive excess kurtosis indicates dally returns probability distribution more peaked ‘than normal probability distribution. © Negative excess kurtosis indicates daily returns probability distribution flatter than normal probably distribution. ot ae Fee Balt a)? EXFINSIS, f= © Diego Feméndez Garcia 2015-2017 wwwcextnss.com «Volatility Hedge Futures Strategy + VelocityShares Volatility Hedged Large Cap Index® consists of hypothetically replicating volatlity hedge futures strategy with S&P 500 as undlerlying asset and dynamic long/short VIX futures volatility component with neviral volatiity exposure target. + Velocityshares. "VelocityShares Hedged Large Cap Indices Methodology”. 2013. + Investmentvehicle options include. © Janus SPXH Velocity Volatiity Hedged Large Cap ETF EXFINSIS. = © Diego Feendinder Garcia 2015-2017 vyownusexfinss.comVolatility Hedge Futures Strategy + tthas following monthly rebalanced allocations. + 85% allocation to S&P 500 index with dividends reinvested. + 15% allocation to dynamic long/short Vix futures neutral targeted volatility exposure component. Volatility component has following quarterly rebalanced allocations. © 33.33% allocation to twice the daily retum of S&P 500 VIX Futures Total Return - Short Term index. © 66.66% allocation to inverse of the daily return of S&P 500 VIX Futures Total Return - Short Term Index. © S&P Dow Jones, "S&P VIX Futures Indices Methodology”. 2016. EXFINSIS. = © Diego Feendinder Garcia 2015-2017 vyownusexfinss.comVolatility Tail Hedge Futures Strategy + Velocityshares Tail Risk Hedged Large Cap Index® consists of hypothetically replicating Volatility tail hedge futures strategy with S&P 500 as underlying asset anc dynamic long/short Vix futures volatiity component with 35% long volatilty exposure target. + Velocityshares. "VelocityShares Hediged Large Cap Indices Methodology”. 2013. + Investment vehicle options include. (© Janus TRSK Velocity Tail Risk Hedged Large Cap ETF EXFINSIS. = © Diego Forndinde2 Garcia 2015-2017 wowrnextinscom ©Volatility Tail Hedge Futures Strategy + thas following monthly rebalanced allocations. + 85% allocationto S&P 500 index with dividends reinvested. + 15% allocation to dynamic long/short VIX futures neutral targeted volatility exposure. ‘component. Volatility component has following quarterly rebalanced allocations. © 45% allocation to twice the daily return of S&P 500 VIX Futures Total Return ~ Short Term Index. © 55% allocation to inverse of the daily retum of S&P 500 VIX Futures Total Retum = Short Term Index. © S&P Dow Jones. "S&P VIX Futures Indices Methodology". 2016 EXFINSIS = © Diego Femandez Garcia 2015-2017 wwewcatins.com