A portfolio insurance strategy for volatility index (VIX) futures

• Propose a methodology using VIX futures as an investment asset while controlling downside risk.
• Build three portfolio insurance (PI) strategies using option-based portfolio insurance (OBPI) and constant proportion portfolio insurance (CPPI) for VIX futures.
• The effectiveness of the strategy is tested by historical return simulation of eight subsamples and a full sample for the period of Feb. 2007–Jan. 2015.
• It is found that the PI strategy can be a tool for both investment and diversification.

This paper proposes a methodology using VIX futures as an investment asset while controlling downside risk. For this purpose, three portfolio insurance (PI) strategies are built by using option-based portfolio insurance (OBPI) and constant proportion (CPPI) for VIX futures. The effectiveness of the strategy is tested by historical return simulation of eight subsamples and a full sample for the period of Feb. 2007–Jan. 2015. We evaluate the performance of each strategy first as a pure investment tool and then as a diversification tool for S&P500 index. In the subsample simulation, all PI strategies perfectly protect its floor. Protective Put and CPPI appropriately catch up with strong and trendy bull markets of VIX futures. Resetting achieves a considerable return for the periods of return-reversal. In the full-sample simulation, the daily mean returns of the PI strategy are all greater than the benchmark's. The PI strategy is also a good diversification tool for S&P500 index.