Shall I compare thee to a summer's day?
One of the big struggles with Short VIX is the comparison to buy and hold on XIV or SVXY, as most systems that involve signals, tactically entering/exiting, underperform. Furthermore most of the systems that beat buy and hold from Quantopian, etc, are heavily curve over fitted, some involving straight up constant variables.
Thus one of my main bulletpoints/takeaways that I keep in mind is
don't worry about XIV buy and hold!
When considering the massive downside risk, as well as the periods when you hit a profit target and get out/wait for reentry (such as the last ~6 months?), I think its helpful to almost think of buy and hold vs. short VIX options as apples and oranges.
As with any option strategy, the yield curve is closer to the poker cash game graph of incremental growth over time, with big draw downs- which I mentioned in a previous article.
To bring in a macro view-
Many articles note the overall contraction in VIX, possibly as a result of how much trading has entered the space and could ultimately be warping it. Another possibility is the increasing awareness of how much drag long option protection adds to a portfolio. Or the most obvious belief that Mama Yellen will buy the dip before we are even able to.
Whatever the combined causes, as short VIX investors we must have a contingency plan for longer periods of low VIX, which a buy and hold strategy doesn't really account for. Given that historically some of the most conservative short VIX strategies of buying XIV when VIX = 25, 20, or maybe ~16, you might only have 2-5 trades a year.
To extrapolate further, would you be comfortable trading short VIX if you knew that the optimal trade was only once every 2 years? What about every 5 or 10?
Where is the line where you say "ok, I will trade off theoretical yield for consistency"?
GM Hikaru Nakamura has actually started options, and was glad to see someone else see across the domains of options, chess and poker. For XIV buy and hold, I see this as giving up on chess because computers will always win.. don't let that stop your playing or investing! If you see computer chess as apples and oranges from human chess, devoid with fear, time trouble, self doubt, needing to draw, and more, then maybe you can extrapolate to short VIX buy and hold- a computer/model lives forever, so it doesn't care about consistency of returns, the psychology of draw downs, the self doubt of long periods with no open position, the pangs of disprized love, the law's delay, the insolence of office and the spurns that patient merit of the unworthy takes- I'm getting carried away.
Ok ok in summary- Trading is psychology, don't force another psychology on yourself if it doesn't help you! Don't blindly lock in on "This strategy is useless if it doesn't outperform buy and hold" when they are completely different animals! Short VIX is constantly evolving due to macro factors, and especially with the current contraction it is possible that buy and hold will be the underperformer going forward as no buy and hold strategy will be holding/entering with VIX in the 9 handle.
Ok now tweet at me for how wrong I am