codypd

Is the VIX predictable?

INDEX:VIX   CBOE Volatility Index
vix
539 23 5
vix
I read an article the other day claiming "The VIX             is Very Predictable"

It claimed the method to buy/sell "the VIX" (which itself can't be bought or sold) is to take the 11 day ema and sma , plot them and buy when the ema goes under the sma , and sell when the ema goes above the sma .

Here is a chart of the vix             and a little indicator that I coded up using the method described. The red line is the ema and the white is the sma . I colored the background "green = buy" and "red = sell".

Seems there needs to be a bit of refinement for this method to work ... but it's a start. Would welcome other ideas in the comments.

from https://marketsci.wordpress.com/2008/07/28/the-vix-is-very-predictable/
No, you can't buy the VIX, but you can buy an ETF of it, then effectively you can trade it.
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codypd navtis
In deference to the author of the original article that I modelled this from, he too made that point. He also pointed out that most every derivative out there (VXX, UVXY, etc) that "track the VIX" do it poorly. Good thing is the consistency with which they do it poorly, like UVXY, offers many trading opportunities.
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Very interesting method/chart to indicate buys or sells based on vix. Agree you can trade vix with ETFs (or ETNs) such as TVIX and VXX, as well as others. Please keep trying to refine and test the method to see how it plays out. Usually when vix rises equities fall and vice versa, which is another trading use. Keep posting updates if you continue to refine the method. Thanks and good luck. :)
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mike1v mike1v
One more comment. Based on the chart the VIX should be a buy right now and should begin to rise. While the VIX can go lower (~10) many folks treat ~12.50 as a buy point. Next week should be interesting!
+1 Reply
mike1v mike1v
The dashes above should mean "around" 10 & 12.50.
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codypd mike1v
Thanks! I will keep working at this - a decent VIX indicator could serve as a "mood ring" for the S&P. I've been looking at how the VVIX can be used in conjunction with the VIX but haven't come up with anything yet that backtests well.
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I am happy you mentioned you can't trade the VIX which is just a statistic calc'd by the CBOE -- many people don't realize this!

One thing to point out, which is really neither here nor there but FYI -- I am familiar with that author, and he was big into mean-reversion strategies. During the period of 08-09 - mean reversion strategies had an extraordinary period of outperformance relative to baseline results.

You could literally sell short, don't know, SKF on *any* 3 days in a row up, or RSI 2 > 90 and close 1 or two days later with like an 80-90% win rate and low drawdown. I remember them being particular popular in the blogosphere at that time. The issue is that markets being cyclical, this strategy fell out of favor and began to underperform mid 2009 to more or less now, as the markets got more trendy.

So what is my point? The only point is that this strategy was written and tested in 2008, a highly mean-reversionary period in the market, by an author who's entire line of work was centered around mean-reversion strategies. I think this would be important background info to have to test the efficacy of it today.
+3 Reply
codypd SPYderCrusher
That is very helpful. Don't want to imply here with my attempt to implement the indicator that the original author "had it wrong." Good of you to point out that context. Thank you.
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Oh of course, that wasn't my intent either -- just thought it would be some back history worth mentioning is all :D
+2 Reply
The easy way to trade VIX is to wait for a peak, and keep shorting because of the decay involved with futures (VXX).
The only risk being the fat-tailed distribution (eg: another lehman brother), so risk management is equally important.
+1 Reply
LastBattle LastBattle
I'll never trade/make decisions based on a single indicator.
I can see that VIX EMA is smoothed which is clearly a flaw to me. They often lag behind by several candles, and by the time you get a buy signal, risk reward would have already been low. Would you want to be the herd of sheeps following the indicator or would you want to get ahead of the sheeps? Remember, there'll always be 90% losers and 10% winners.

There are also exceptional conditions where the market may remain constantly overbought for an extended period of time due to fears from events like grexit if should it happen. Can you still trust that indicator to sell short?
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codypd LastBattle
I am price biased as a trader. Best indicator is the price movement and indicators are usually a combination of price and volume with some smoothing function so they invariably lag. For many that works because they play time frames long enough where missing a few points while the indicator catches up. But when trading options the theta eats indicator delays. Anyways - was looking at this ViX idea the other night because I would like to better judge peaks on the VIX. I am ok with bottoms - they just have a statistical bias that is easy to read.
+2 Reply
codypd LastBattle
Agree. I am a regular trader of VIX related options and love making money on the deep contango that these futures contracts go into. The risk management you mention is indeed very important and I am not sure I do that well - it is tempting to throw more into a trade when prior ones have paid so well.
+2 Reply
codypd: I don't know whether or not you read the follow-up article to "The VIX is very predictable" or not. The article (link below) looks at the VIX and historical volatility in more detail. I also don't know if the article will help in any refinements you might make, but thought I'd post it just in case. The comments section has some good stuff also. Good luck!

https://marketsci.wordpress.com/2008/11/12/trading-strategy-the-vix-spread-and-the-stock-market/

+1 Reply
codypd mike1v
I hadn't. Thanks!
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codypd, take a look at this: http://imgur.com/aHeZMmN results based on non-summer months, with VIX between 12 and 13, and VIX is dropping. In most cases it gained during the next couple weeks.
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AlgoGuy AlgoGuy
disregard that one...there was a mistake...will fix and re-upload
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AlgoGuy AlgoGuy
fixed version http://charts.stocktwits.com/production/original_35264201.PNG?1428850478
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codypd AlgoGuy
Thanks! Will look at it.
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AlgoGuy codypd
the catch is, futures spread is high, so VIX will most likely go up, but futures spread will probably narrow and VXX might by unchanged.
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My small experience of trying to trade the VIX via VXX was far less then predictable. VXX is NOT a predictable product. My experience was aprox. 30% correlation when VIX was positive and near 1 to 1 correlation when VIX was down. Occasionally the two moved in opposite directions. Be very careful with VXX.
+1 Reply
codypd flappinfish
My experience is when you are playing the VIX derivatives you are playing two things: the VIX and the derivative's contango/backwardation behavior. I have found that when youtrack them seperately the success rate improves a great deal. I trade primarily UVXY and SVXY because I have modelled their contango structure which is pretty consistent once the variables are understood.
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codypd flappinfish
Here is an example of a ratio chart that shows the consistency and predicatability of contango for UVXY. When in contango, the rate will be fairly consistent over time for a given "run"
Using Contango / Backwardation channels to predict UVXY prices

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