Saturday, November 27, 2010

When the VIX is up 20% on the Week, What Happens to the VIX and SPY Next Week?

Thanksgiving week ended with the SPY dropping -1.16% and the VIX shooting up 13.60% on Friday.  For the week, the VIX blasted up 23.17%.




This got me to thinking: what happens to volatility when the VIX makes a weekly gain of 20% or more?


VIX up over 20% on the week,  buy VIX; sell 'n' days later. $10,000 per trade; 1993 to present.
Exit 'n'
Days
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
      (5,839.29)
52
20
38.46
-29.57
-1.12
       750.96
      (651.83)
0.72
1.15
2
    (17,276.06)
52
17
32.69
-30.84
-3.32
       975.01
      (967.18)
0.49
1.01
3
    (20,933.44)
52
15
28.85
-37.68
-4.03
   1,115.65
   (1,018.06)
0.44
1.10
4
    (26,498.81)
51
12
23.53
-37.68
-5.20
   1,466.00
   (1,130.53)
0.40
1.30
5
    (15,578.64)
48
16
33.33
-33.22
-3.25
   1,615.22
   (1,294.44)
0.62
1.25


This tells me that volatility tends to contract over the next 1 - 5 days after the VIX closed the week up 20%. Interesting. Short the VXX?

What about adding this criteria: VIX is up over 10% on the last day of the week.


VIX up over 20% on the week and up 10% on the last day of the week,  buy VIX; sell 'n' days later. $10,000 per trade; 1993 to present.
Exit n
Days
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
    (10,372.16)
21
3
14.29
-29.57
-4.94
   1,076.56
      (755.66)
0.24
1.42
2
    (20,652.54)
21
2
9.52
-30.84
-9.83
       472.54
   (1,136.72)
0.04
0.42
3
    (21,468.34)
21
3
14.29
-37.68
-10.22
       997.84
   (1,358.99)
0.12
0.73
4
    (21,311.03)
21
2
9.52
-37.68
-10.15
   3,424.25
   (1,482.08)
0.24
2.31
5
    (14,663.53)
20
3
15.00
-29.12
-7.33
   3,696.05
   (1,514.80)
0.43
2.44


Less occurances, but further confirmation to the volatility contraction idea.

If I then wanted to apply this to buying the SPY, here are the results.


VIX up over 20% on the week and up 10% on the last day of the week,  buy SPY; sell 'n' days later. $10,000 per trade; 1993 to present.
Exit n
Days
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
         1,902.79
21
18
85.71
-1.68
0.91
       127.93
      (133.29)
5.76
0.96
2
         2,718.48
21
18
85.71
-2.35
1.29
       162.02
         (65.98)
14.73
2.46
3
         2,652.67
21
17
80.95
-2.93
1.26
       188.72
      (138.88)
5.78
1.36
4
         2,547.19
21
15
71.43
-6.16
1.21
       246.34
      (191.31)
3.22
1.29
5
         2,110.83
20
14
70.00
-7.55
1.06
       229.72
      (184.22)
2.91
1.25


Looks like a pretty good chance for a short term pop next week. It hasn't happend very often, but when it does, the odds are on your side. 

Good trading out there my friends.

Footnotes

Profit Factor = Profit of Winners / Loss of Losers
Payoff Ratio = Average Win / Average Loss 
Max Trade % DD = intra-trade drawdon on a closing basis

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