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!