Saturday, January 29, 2011

VIX Up 20% in One Day: Bearish Volatility, Bullish S&P 500


Oh boy, the VIX really went off on Friday, rising 24% with huge Futures volume. It was the biggest one day rise since May 20, 2010.  Fear is in the air, primarily due to the unprecedented political events occurring in Egypt. While we do have reasons to be fearful, 24% is a HUGE pop for the VIX, and a lot larger than I was expecting on a day like this. So I wanted to look at the action of the VIX the week following a 20% up day. The table below is presented as if you could trade the VIX directly. It is just for visual purposes; you can't actually trade the Index.

Buy VIX after it's risen 20% in one day; sell 'n'days later. $10,000 per trade; 1990 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
   (14,661.46)
42
11
26.19
-18.06
-3.49
       696.72
         (720.17)
0.34
0.97
2
   (22,930.61)
42
12
28.57
-29.57
-5.46
       762.07
     (1,069.18)
0.29
0.71
3
   (28,188.61)
42
9
21.43
-31.15
-6.71
       908.29
     (1,101.91)
0.22
0.82
4
   (36,815.69)
41
7
17.07
-37.68
-8.98
       936.34
     (1,275.59)
0.15
0.73
5
   (38,060.43)
40
10
25
-37.68
-9.52
       698.69
     (1,501.58)
0.16
0.47


This shows that volatility usually drops after a big 20% up day. This makes sense. We had a major 24% move and the VIX is a mean reverting instrument. There's going to be some retracement.

I also wanted to look at the VIX action when one of these 20% up days occurs on the last trading day of the week. Will the weekend give people time to process the fearful events? Will cooler heads be trading on Monday morning?


Buy VIX after it's risen 20% on the last day of the week; sell 'n'days later. $10,000 per trade; 1990 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
      (6,441.21)
15
3
20.00
-29.57
-4.29
    1,163.98
          (827.76)
0.35
1.41
2
    (12,640.67)
15
1
6.67
-30.84
-8.43
    1,395.27
      (1,002.57)
0.10
1.39
3
    (15,527.52)
15
1
6.67
-37.68
-10.35
       237.69
      (1,126.09)
0.02
0.21
4
    (19,777.90)
15
0
0.00
-37.68
-13.19
   N/A 
      (1,318.53)
0.00
 N/A
5
    (20,774.51)
15
1
6.67
-37.68
-13.85
            9.44
      (1,484.57)
0.00
0.01


Less occurrences, but further support for a volatility contraction. But the "average profit" on the first and second day caught my eye. The VIX rarely closes up on the first or second day after the 20% move, but if it does, it usually goes up BIG. So I wouldn't be surprised if there is a continued spike in volatility on Monday/Tuesday before a swift drop off.

Applying this scenario to the S&P 500 Index, SPX, we get this:


Buy the SPY when the VIX has risen 20% in one day; exit RSI(2)>65. 1990 to present.
Exit n
 days
S &P 500 Points
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
         573.58
41
32
78.05
-22.90
1.44
        23.35
         (19.30)
4.30
1.21


I added an exit when RSI(2)>65 but you could use any exit (first up day or close > 5 day MA) and the results are positive. This looks like a classic case of being 'greedy when others are fearful'.

As usual, be sure to consider your own factors before taking any action. With the Egypt unrest and the market seemingly on the verge of breaking down, we should have an interesting open Monday.

Good trading out there.


-----------------------------------------------------------------------------------------------------------------------

Last 10 $SPX Trades:


Ticker
Trade
Date
Price
Ex. date
Ex. Price
% chg
# bars
$SPX
Long
12/1/2008
816.21
12/3/2008
870.74
6.68%
3
-0.06%
8.87%
$SPX
Long
1/20/2009
805.22
1/27/2009
845.71
5.03%
6
-0.11%
5.88%
$SPX
Long
10/30/2009
1036.19
11/5/2009
1066.63
2.94%
5
-0.66%
2.94%
$SPX
Long
11/27/2009
1091.49
12/1/2009
1108.86
1.59%
3
-0.71%
1.59%
$SPX
Long
1/22/2010
1091.76
2/2/2010
1103.32
1.06%
8
-1.85%
2.17%
$SPX
Long
2/4/2010
1063.11
2/11/2010
1078.47
1.44%
6
-1.75%
3.21%
$SPX
Long
4/27/2010
1183.71
4/29/2010
1206.78
1.95%
3
-0.18%
2.34%
$SPX
Long
5/6/2010
1128.15
5/10/2010
1159.73
2.80%
3
-5.53%
3.50%
$SPX
Long
5/20/2010
1071.59
5/27/2010
1103.06
2.94%
6
-2.88%
3.34%
$SPX
Long
6/4/2010
1064.88
6/10/2010
1086.84
2.06%
5
-2.13%
3.15%

1 comments:

Anonymous said...

Nice analysis. Relative to trading, what are your thoughts on VXX vs. VXZ (for example), on different timeframes?

Post a Comment