After my VIX post a couple of days ago, “Frank” made some interesting comments in the comment section. He duplicated part of the system I discussed, but his results were very different. Using a 15% VIX stretch (a close 15% above the 10ma) he found 17 of 18 short trades since 2004 to be winners if you wait for a reversion to the 10ma to exit.

The big differences sparked some good conversation over at the Daily Options Report, which has picked up on this study. So I felt I should clear up a few things.

1) I mistyped in my post. Options were not used in my testing – futures were.

2) My “system” looked at several measures of overbought/oversold – it generally entered if more than one triggered and exited when the triggers were removed. The 15% VIX stretch was one example.

3) I did not scale in. If a trigger occurred, the system was basically “all in”. I’m sure scaling as Frank did, would help.

4) I don’t think 1, 2, or 3 above really matter much. Looking back to the beginning of 2004 I did a quick count of the number of days that the VIX closed at least 15% above its 10ma. I counted about 70 times. Frank only found 18 times. I suspect Frank was looking for a 15% stretch in the futures. I was looking for a 15% stretch in the actual VIX.

My point was to show that the futures and options could not be easily traded based on the action of the VIX alone. A stretch in the futures successfully reverting to its mean doesn’t surprise me. I’ll bet in many of those 18 cases the VIX index would have put the system into the trade even earlier and at a worse price – turning several of Frank’s winners into losers.

To sum up – the VIX is not tradable. Buying calls or puts based on VIX action as I’ve seen suggested in the media looks good on the surface but is a horrible strategy. Frank has generously shown that astute traders CAN successfully trade VIX futures by focusing on VIX futures action.
Below is a chart of the VIX(green) and front month VIX futures (orange). The chart is a few months old because I don’t have my futures data fully updated (I don’t trade it). The takeaway from this chart is that sharp moves in the VIX “cash” index are dulled in the futures. Note how while they generally move in the same direction, the cash VIX will oscillate around the futures. If you look at futures further out than front month, this “dulling” of the VIX moves by the futures will be even more pronounced.