Operation VIX Overwatch
I put up a small poll in the chat, and the readers responded. HGT is going to turn its attention to the high-value target—the Volatility Index.
The other day I asked the chat what they would like to see next. Out of the three options I presented, everyone who responded answered with the same response. They wanted to see a breakdown and dive into the VIX and learn how it can help us as traders.
This is fantastic new for me, because I too want to know this information. So, I sat down and I started jotting down all of the questions I wanted answered and what kind of experiments I would like to try and run. As this list grew, I realized that this was going to be a multiple part series. I also realized, that I can technically tie in a part about creating correlation matrixes in Python, as we are going to want to use some of those when we are examining the VIX and VIX traded products.
Here is a brief (and not permanent) outline of what I would like to cover:
Post 1
What is the VIX?
How is is calculated?
How do traders use it?
How is it used on the macro-economic scale.
Discuss the different products that can be used to trade the VIX (ETFs, options, futures, etc.)
Post 2
Run the VIX and VIX products through the soundness tests.
Check correlation relationships between VIX products and against random equity products such as Index ETF’s and futures contracts.
Discuss the use of the VIX as a trade filter for automated systems.
Discuss the use of the VIX for risk-adjusted position sizing.
Post 3
See if we can find positively or negatively correlated pairs of instruments to trade with the VIX.
Discuss different vessels for trading these relationships.
Create a simple strategy and demonstrate the usage of the VIX as a trade filter and for risk-adjsuted position sizing.
Perhaps code a VIX related trade system that uses a correlated (or uncorrelated) relationship to take positions and hedge those positions with a different isntrument. (This is a hopeful thought).
My goal would be to finish up these posts throughout the next couple of weeks, with the first article completed by Monday. The plan is to have a strategy drop alongside Post 3. Also, since we will be using correlation matrixes during this research process, I am going to go ahead and get a piece out about creating that little diddy in Python. Except this time, I think I might do it as a video post.
Stay tuned for some good information and as always,
Happy Hunting!
If you have any suggestions, or any thing you would like to see looked at in this series, post a comment.
Regarding the use of VIX as a filter - SPX can be a better filter, and even using SPX as a filter to trade the VIX https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4808230