- Description
- How to Trade VIX – Wall Street’s Fear Index
- Trading strategy: VIX Reversal
- How to Trade VIX – Wall Street’s Fear Index
The VXX Trading System takes advantage of long-term market trends and volatility to create consistent profits. Includes monthly status emails as well as emailed alerts and trade signals. Category Lewy One of their objections to the growth of index funds stems from the putative problem of As such, traders try to trade the VIX by trading products that track the volatility index.
There are two short sell signals red circles and one buy signal green circle. It is rare that a stock makes such an instantaneous slide intra-day. Nevertheless, an emergency stop loss would have saved the trader money. The results of the VIX Reversal strategy vary from stock to stock. These screenshots show back-tests for a number of stocks. Given that the strategy is based on a 5-minute time frame the back-tests cover only 8 months.
Hence, they need to be interpreted with the necessary skepticism. Carr is interesting in that it is based on the VIX. The VIX is one of the few forward looking indicators and is known for being relatively precise. Although there is nothing wrong with simple strategies this one appears too simplistic.
The strategy would probably benefit from at least an emergency stop and a signals filter based on the size of the movement in the VIX. It may also be useful to experiment with a profit target or a time stop given that on numerous occasions a large part of the paper profits are lost again before the VIX MAs cross. Free trading newsletter Register. When to open a position? When to close a position? The results on Heinz.
Graphic days VXX Forecast from to diffusion only. The red-line in Graphic is a naive implementation of this idea. At expiry one enters the next position. One enters only a position, if this MC-Sharpe-Ratio is above a given threshold. For the yellow-strategy the minimum Sharpe Ratio is 0. Entering a position should be at least an expected break even. For the green-strategy the threshold is 0.
The strategy stays sometimes for a considerable amount of time on the sideline. Note: For simplicity the different currencies of the Futures were not taken into account.
Description
The currency risk makes things worse. This is a convention from previous working papers. The model seems to have an economic value for defining profitable entry-points. But any attempts to define model-based exit conditions failed. One goes the 4th Future long and the 3rd Future short. The position is kept till the expiry of the initial 3rd Future.
One exploits the fact that the gap between the 4th and 3rd Future is relative small and opens till expiry. The entry point is calculated like above with a model of the spread. The MC-Sharpe Ratio must be greater zero. There is additionally a stop loss if the spread moves in the wrong direction. This quantile bound is calculated at each step of the MC- paths. One compares the realized loss after 1 trading day with the MC-loss-distribution after 1 day, the realized loss after 2 tradings days with the MC-loss-distribution after 2 days ….
One goes initially 10 Futures long and short.
How to Trade VIX – Wall Street’s Fear Index
The performance is without trading costs attractive. One can increase the leverage because the downside risk is relative low.
Unfortunately the situation is less profitable if one takes trading-costs into account. The VIX Futures have a minimal bid-ask-spread of 0. This is also most of the time the actual spread. This is in general the problem of spread strategies. The trading- costs eat up a considerable part of the profit.
But trading life would be otherwise too simple and boring. One can't compare these results with that of Colin Bennet because the book does not contain one. I have unfortunately only data for the 1st, 2nd and 4th to 7th Futures. The 3rd is missing in the free data collection of Eurex. This strategy is based on the roll-value of the VIX Futures. It assumes that the current Futures value does not forecast the VIX at expiry.
The current VIX level is a better forecast. The strategy does not take the mean-reverting behavior of the VIX into account. The current strategy uses the model. One selects a Future which has a maturity between 21 and 31 trading days.
Trading strategy: VIX Reversal
This is according the results in [5] and also according actual trading the most interesting entry point. One enters the position if the MC-Sharpe-Ratio is above a given threshold. For the red line in Graphic the threshold was set to zero. The leverage is as before 2.
How to Trade VIX – Wall Street’s Fear Index
The Future is always kept till expiry. Trading costs are as in paragraph 5 the bid-ask spread of 0. The strategy looses a lot of money in the August crash and in October The yellow line shows the behavior if one increases the Sharpe-Ratio to 0.
There is no difference during times of trouble. But the strategy stays in on the sideline. This was a low VIX regime. The model enters the short-position during a crash, because the mean-reverting behavior should drive down the values. This is in principle right, but the high volatility regime lasts sometimes longer. Staying on the sideline during a very low-volatility regime has a similar logic. The model assumes that the short position is due to mean-reversion not profitable.
This is a valid assumption. But one has still the problem that the strategy enters in times of troubles a short VIX Future position. This ratio is under normal market conditions below 1. It moves above 1 during a market turmoil. Graphic shows the performance if one augments the model with the IVTS. The red line shows a strategy with a minimum MC-Sharpe Ratio of 0. Additionally the IVTS must be at the entry below 1.
The position is closed if the IVTS moves above 1. The performance is almost identical if one removes the MC-Sharpe-Ratio condition at all. The threshold of 0. This avoids the very low VIX regime with little profit potential. The IVTS signal can not cope with this situation.