The Volatility Index -- Part 2
The Volatility Index -- Part 2
How can we use the VIX to help influence trade decisions? I don't have all the answers, but I have a few.
Disclaimer: the following post is an organized representation of my research and project notes. It doesn’t represent any type of advice, financial or otherwise. Its purpose is to be informative and educational. Backtest results are based on historical data, not real-time data. There is no guarantee that these hypothetical results will continue in the future. Day trading is extremely risky, and I do not suggest running any of these strategies live.
Since I have to make up for lost time, we are going to present the next few posts in rapid succession. This is part 2 of the VIX series and will discuss a few ways that the VIX can be used to help influence trade decisions. If you missed the previous article, check it out below.
There are going to be some changes in the near future with the GitHub and the community. I have noticed that about half the subscribers I have use the GitHub and ultimately, it doesn't do much other than hold the code from the articles. I update the PQT library pretty regularly, but it is far from done. The strategies get updated less so. They aren't meant to be updated daily. Instead, I am hoping to test some of them in with out-of-sample data at the end of the year so we can see if any of them were just random noise or if there may really be an edge to them. Anyway, expect some updates in the chat in the near future with my ideas.
Moving on.
Can we use the VIX to help predict the returns of SPY?
The link below is the indicator test report I usually use for testing features. In this case, I do that with the raw VIX value and a normalized (z-score) value against the log returns of SPY. I also use the returns of several other instruments to see if there is any relationship with returns. The results are quite interesting. For example, using the returns of SPY to predict the returns for SPY the following day. I know it has nothing to do with the VIX/SPY relationships we are looking at, but an interesting find none the less.
Moving forward, this is how I am going to present my feature tests and strategy results. This way they can always be found at the Reports subdomain. This helps me write articles quickly as the process to get these reports there is fairly automated.
Conclusion
The next two posts are going to be strategy posts. They are both futures trading strategies that use the VIX/SPY relationship and one indicator to time trade entries.
I want to look into the results we saw for predicting SPY returns with SPY returns. I will probably us ES and the actual SPX index for this test. If I find something cool, expect it to be Strategy 14.
That's it for today. Just a quick article to show case some interesting findings with the testing suite using SPY and VIX.
Happy Hunting.
Oh yeah, don't hate me if this (and the next few posts) aren't tidied or have some grammar issues. I am essentially skipping my usual editing phase in order to play catch up from the storm. I hope you understand. I also hope that my grammar isn't so terrible on first pass.
The code for strategies and the custom functions/framework I use for strategy development can be found at the Hunt Gather Trade GitHub. This code repository will house all code related to articles and strategy development. If there are any paid subscribers without access, please contact me via e-mail. I do my best to invite members quickly after they subscribe. That being said, please try and make sure the e-mail you use with Substack is the e-mail associated with GitHub. It is difficult to track members otherwise.
Feel free to comment below or e-mail me if you need help with anything, wish to criticize, or have thoughts on improvements. Paid subscribers can access this code and more at the private HGT GitHub repo. As always, this newsletter represents refined versions of my research notes. That means these notes are plastic. There could be mistakes or better ways to accomplish what I am trying to do. Nothing is perfect, and I always look for ways to improve my techniques.
I'm not well versed in statistics, but that's interesting. Once it's speaking in terms of returns, drawdown, profit factors will be more my language :)