Friday, December 17, 2010

VIX Closes Below Bollinger Band (20, 2): Volatility Up

The bottom really has fallen out of the VIX. It's hitting levels it has not seen in years. I guess this is complacency at full tilt.



Should the VIX close below its Bollinger Band (20,2) today, where can we expect the VIX to move over the next 5 trading days?


Buy  VIX when it closes below Bollinger Band (20,2) ; sell 'n' days later. $10,000 per trade; 1995 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
    19,055.92
80
53
66.25
-5.96
2.38
      490.59
  (257.23)
3.74
1.91
2
    36,353.22
72
60
83.33
-8.55
5.05
      690.55
  (423.30)
8.16
1.63
3
    41,257.07
70
51
72.86
-11.87
5.89
      917.59
  (291.57)
8.45
3.15
4
    45,586.29
70
52
74.29
-13.92
6.51
  1,005.72
  (372.84)
7.79
2.70
5
    47,518.96
66
45
68.18
-16.27
7.20
  1,266.88
  (451.94)
6.01
2.80


This is indicating an uptick in volatility the week following this event.  Watch the Maximum Trade Drawdown though; the VIX can definitely still go down.

But how does seasonality play into all this? Let's look at the few times this has happened in December:


Buy VIX when it closes below Bollinger Band (20,2) in December only ; sell 'n' days later. $10,000 per trade; 1995 to present.
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
      2,676.90
8
5
62.50
-1.00
3.35
      585.73
    (83.93)
11.63
6.98
2
      4,787.22
7
5
71.43
-3.24
6.84
  1,086.46
  (322.55)
8.42
3.37
5
      7,593.30
6
5
83.33
-13.19
12.66
  1,664.41
  (728.74)
11.42
2.28
3
      4,529.29
6
5
83.33
-5.62
7.55
      990.07
  (421.05)
11.76
2.35
4
      3,803.24
6
5
83.33
-12.72
6.34
      890.20
  (647.77)
6.87
1.37


Basically in line with the history of all trades. At the time of writing, the VIX was not trading below its Bollinger Band (20,2), but it was very close. If it does close below that level today or sometime next week, this study would something to keep in mind. Also remember that I'm only looking at BB (20,2); there are many other factors/indicators to consider.

Here is how SPY prices translate:


Buy SPY when VIX closes below Bollinger Band (20,2) ; sell 'n' days later. $10,000 per trade; 1995 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
       (286.61)
80
36
45.00
-3.32
-0.04
        70.01
    (63.79)
0.90
1.10
2
    (2,009.39)
72
33
45.83
-4.74
-0.28
        85.16
  (123.58)
0.58
0.69
3
    (3,186.98)
70
34
48.57
-5.79
-0.46
        90.56
  (174.05)
0.49
0.52
4
    (3,381.93)
70
34
48.57
-5.85
-0.48
        86.29
  (175.44)
0.46
0.49
5
    (4,630.95)
66
29
43.94
-6.72
-0.70
      103.73
  (206.46)
0.39
0.50

Good trading out there.

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