Daily Commentary  Posted on Wednesday, February 11, 2015, 5:12 PM GMT +1
The VIX® – A RearView Mirror Or Crystal Ball
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Most recently there has been a lot of chatter and discussion in the financial blogosphere regarding the CBOE Volatility Index (VIX^{®}) soaring higher since December 5, 2014 when the index closed at its preliminary low of 11.82 (the index closed at 22.39 on January 15, 2015), despite the fact that the S&P 500 Index has (almost) always trading in short distance to its alltime high of 2,090.57.
But if you don’t think of (historical / realized) volatility in terms of daily closing prices only, but take into account intraday and day to day high / low prices as well, the solution might present itself.
Table 1 below shows the 1 month, 3 months and 1 year average, 1 standard deviation(s), maximum and minimum values of the 5day exponantial moving average of the maximum of daily (intraday) ups and downs – blue line , calculated as follows:
5day EMA [ LN [ MAX (
 today’s intraday high / today’s intraday low ;
 1 + ABS [today’s intraday high / yesterday’s intraday low – 1] ;
 1 + ABS [today’s intraday low / yesterday’s intraday high – 1] ;
)]]
(in order to get positive values and absolute movements only)
With 2.01%, the current 1 month average is running way above the 3 months and 1year average, with a very low standard daviation of 0.24%, and has never been lower than 1.56% over the course of the last month.
Term  5day EMA … 

1 month  AVG  2.01% 
SD  0.24%  
MAX  2.54%  
MIN  1.56%  
3 month  AVG  1.52% 
SD  0.63%  
MAX  2.88%  
MIN  0.59%  
1 year  AVG  1.34% 
SD  0.55%  
MAX  3.13%  
MIN  0.59% 
Image I below shows the 1year relationship between the CBOE Volatility Index (VIX^{®}) (red line) and the 5day exponantial moving average of the maximum of daily (intraday) ups and downs (blue line).
Image I – VIX^{®} vs. 5day EMA [2day Max. Intraday Volatility]
(02/10/2014 – present)
The high correlation between both curves is more than striking. The VIX^{®} index mirrors the 5day EMA of … very closely, independently if those bigger intraday swings happend on a monthly/annual/alltime S&P 500 index high.
Image II below shows the historical distribution (01/02/1990 – present) of VIX^{®} values when the 5day EMA of … closed between 1.75% and 2.25%, as it did most of the time over the course of the last month. On average the VIX^{®} was trading at or around 20.82 , close to the average VIX^{®} value over the course of the last month.
Image II – VIX^{®} vs. 5day EMA [2day Max. Intraday Volatility]
(01/02/1990 – present)
In contrast: Image III below shows the historical distribution (01/02/1990 – present) of VIX^{®} values when the 5day EMA of … closed between 0% and 1.00%. With such low intraday swings, it should come to nobody’s surprise that the VIX^{®} was trading between 12 and 14 almost 90% of the time.
Image III – VIX^{®} vs. 5day EMA [2day Max. Intraday Volatility]
(01/02/1990 – present)
From my perspective the VIX^{®} seems to be highly correlated to then then recent (realized) intraday volatility (looking into the rearview), with market participants regularly expecting a continuation of this high/low intraday volatility. You will rarely see a low realized volatility (5day EMA of … lower than 1.00%) in combination with a much higher VIX^{®} value (acting a fear gauge representing market participant’s expectation of S&P 500 index volatility over the course of the then following 30 days), and vice versa.
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Have a profitable week,
Frank
Disclosure: I’am long/short XIV, and long/short VIX, RVX and EURO STOXX 50 volatility futures.
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Remarks: Due to their conceptual scope – and if not explicitly stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (endofday prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets). Index data (e.g. S&P 500 cash index) does not account for dividend and cash payments. The results are regularly based on simulated data and/or hypothetical performance and do not represent real trading.
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Disclaimer
The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.
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(Data courtesy of MetaStock and Pinnacle Data Corp., and for data import, testing, surveys and statistics I use MATLAB from MathWorks)
Comments (27)
[…] The VIX® – A RearView Mirror Or Crystal Ball [Trading the Odds] Most recently there has been a lot of chatter and discussion in the financial blogosphere regarding the CBOE Volatility Index (VIX®) soaring higher since December 5, 2014 when the index closed at its preliminar… […]
Simply exhaustive as usual, thanks.
https://nightlypatterns.wordpress.com
Frank,
I get slightly different values for the 5 day EMA of the max S&P500 intraday volatility. Maybe there is something I don’t understand in your formula
5day EMA [ LN [ MAX (
today’s intraday high / today’s intraday low ;
1 + [today’s intraday high / yesterday’s intraday low – 1] ;
1 + [today’s intraday low / yesterday’s intraday high – 1] ;
)]]
why is there 1 + [TIH/YIL – 1] as 11=0 and this simplifies into TIH/YIL? And the same for the last row. Or am I missing something?
EQ,
you’re correct, I forgot the “ABS” regarding the brackets (“1 + ABS [today’s intraday high / yesterday’s intraday low – 1]”). The posting has been corrected respectively.
Thanks again for the hint.
Best,
Frank
I tested VRP strategies with historical volatility measures taking into account highs and lows, such as Parkinson, GarmanKlass etc. None of them outperform the traditional closetoclose estimator.
I take it you are no longer tracking your modified VRP strategy? No updates on it?
I still track it, but do not post updates on a daily basis any longer.
Frank! I miss your insights! Have you considered the following analysis before?
For a given value of VIX (i.e. 14), we can look back at historical data to see what the 30day weighted average futures price premium to spot VIX has been and plot that data on a bell curve.
I have not done the calculations myself, I would absolutely love to but haven’t gone back and manually put in each days % weightings of the front and second month futures but I will eventually as I like to see the math myself.
So for the sake of theoretically explaining my idea, we’ll use the following assumptions:
For when VIX is 14 + 0.50
The premium in the wtd avg futures (30day constant maturity value – VIX spot) has historically ranged between 15% to 25% with a mean of 20% for simplicity.
If currently VIX is 14 and the premium in the 30day wtd avg future is above 20% I would continue to hold XIV. Should it drop below the mean then I would consider selling my position in XIV as the futures would be undervalued compared to historical levels given that level of VIX.
This is all hypothetical focourse and not representative of today but still, I think it is worth looking into as a way of determining when to enter/exit volatility positions.
Please let me know your thoughts! And please bring back the daily tracking of the portfolio!!
Best regards,
– CFA Investor
Enjoy the blog and wealth of information. Do you sense…… that there has been a quiet shift across volatility related and tradable products? A 270 point down move in the Dow and the respective volatility products and volatility were are all very muted.
Overnight trading ranges for the US Futures have been unusually small for the past 2 weeks.
A quick comment from an attendee at the CBOE conference last week mentioned that “the big” seller of volatility has been gone since October 2014. QE related ?
Comments from others?
Frank, this intraday indicator is much more correlated to VIX then standard volatility. Could it be used directly to measure the volatility risk premium? how could it be converted in a standardized annual volatility measure to be directly compared with VIX?
Hére like have a New trend bull in vix,the vxx,vxz are moré weak,sign cycle Was 28 march,have 3 days trend down,this can are good sign,began up in vix,vxx,vxz.
Today close in vix like in green,maybe s&p500 close in red or little up.
Vix Buy.You play this?
Bye..
From Today to 10 april,maybe 13 april,we have 70% probably have up trend in vix,vxx,30% others scenary.
1013 april is the next point hot,can are top or floor,in this indexs vix,vxx.
This points are stongs,not always ok but 90%.
Remember 1013april point up/down,but i could talk points 2016217 or 2025…
Bye.
Hére have a Big probably trend bull from Today 6 april to 10 april!
You like win this strategy in longuer time,610 april time bull in vix,vxx..
Regards.
10 april vix low and today vxx low,10 april was date hot.1013 april vix/vxx.
Finally here not had up from 6 april to 10 april,this was trend bear.Nobody know the future,this study work sentiment market.
Others markets have point hot low/up,example,brent ukoil like low or top around 15 april next.
Bye.
Great post. You might also find this interesting – Top 6 Reasons to Trade Volatility http://www.vixstrategies.com/top6reasonstotradevolatility2/
Hi Frank,
Thanks for your great posts.
I need hourly data of VIX and SP500. I searced for a lot of sources but find none.
Do you have any reccomendations?
Here are some data vendors, but data is not free of charge:
http://www.pinnacledata.com/
http://www.csidata.com/
http://www.equis.com/
http://www.iqfeed.net/
Thank you for the blogs about trading XIV and VXX, which have an enormous amount of information to digest. I apologize for such a basic question, but I cannot find an answer in the blogs or comments. It is about the use of “LN” in the EMAs, for example:
In “The VIX – A RearView Mirror or Crystal Ball”, the following quantity is said to represent the “exponential moving average of the maximum of daily (intraday) ups and downs”:
5day EMA [ LN [ MAX (
• today’s intraday high / today’s intraday low ;
• 1 + ABS [today’s intraday high / yesterday’s intraday low – 1] ;
• 1 + ABS [today’s intraday low / yesterday’s intraday high – 1] ;
)]]
Also, in June 18th comment on “Volatility Risk Premium Strategy – And the (Preliminary) Outperformer Is …”, the 2day historical volatility (HV) is calculated as:
STDEV [ LN (today’s close / yesterday’s close) : LN (yesterday’s close / day before yesterday’s close)] * SQRT (251)
I’m afraid I do not understand the use of “LN(…)” in these formulas. Does it mean to take the natural logarithm of the quantity (…)? If so, I do not understand why. In the VRP strategy, the quantity which is averaged is [VIX® – (2day historical volatility of S&P 500 * 100)]. VIX is an annualized standard deviation, expressed as a percentage. Shouldn’t the HV also simply be an annualized standard deviation, expressed as a percentage? If so, what is the role of “LN(…)”?
Thank you very much for your work, sir.
Peter,
utilizing LN (natural logarithm) for the calculation of historical volatility is mandatory. For more information see (among others, there are a lot of sources on the web)
http://www.investopedia.com/articles/06/historicalvolatility.asp
Best,
Frank
Hi Frank,
Thank you for the explanation and reference, which explains that the historical volatility is based on continuously compounded returns, rather than daily compounded returns.
I’ve simulated the portfolio strategy in an Excel workbook, but I’m afraid there must still be something I don’t understand, because my simulated holdings and balances differ somewhat from those that appear in the “Portfolio and Track Record” on this site.
I’m confident in my calculation of VX1VX2, because it matches sample results you provided to Alex on your blog on January 27th. My error must therefore be in the HV or EMA calculation, or both. Here is a link to a google docs version of my workbook; perhaps you (or another reader) would be kind enough to take a few minutes and explain my error to me? Please see the “Simulation” worksheet in the linked workbook:
https://docs.google.com/spreadsheets/d/1ivrUnfxMWJ5pRFzWVbf4VleysyucKaDGU_CLfX1yheU/edit?usp=sharing
Thank you again for your work.
Sincerely,
Peter
Peter,
don’t be confused: The “Portfolio and Track Record” is based on a slightly differet formula, taking into account FED days and the RSI as well. I might be that here is a (small) deviation from the pure formula presented in my posting.
At first glance I coulnd’t detect any problems in our formulas concerning S&P HV and the EMA as well.
Best,
Frank
Hi Frank,
Thank you for the explanation. It leaves me wondering if the “green line” in your posting, “Volatility Risk Premium Strategy – And the (Preliminary) Outperformer Is …”, was generated with the formula in that posting (which I replicated in my Excel workbook), or if the “green line” was based on a slightly different formula.
I am asking because I would like to extend my Excel workbook back to cover the period covered in your abovereferenced posting, and it would be good to know if I may expect to find the “green line” as a result.
Sincerely,
Peter Jacobson
Peter,
the green line represents the formula presented (original one, without any revisions).
Best,
Frank
Hi Frank,
Thank you for the explanations. They enabled me to simulate your published VRP strategy and to identify at least one potentially interesting alternative VRP strategy. Here is a link to some results:
https://drive.google.com/file/d/0B0j01rymsazYSnFvTmMxQjVRMnM/view?usp=sharing
I hope that you or another reader will find this useful. Meanwhile, I would also like to ask you if the portfolio results and switches are still being updated. I cannot see any change since June 30th.
Sincerely,
Peter Jacobson
Peter,
the Portfolio & Track Record page is no longer been updated due to the fact that I already published the formula behind.
At the moment the strategy is / would be significantly under water (a new maximum drawdown). The pure strategy needs some adaption (rising implied volatility in a low realized volatility environment, see one of my postings), position sizing, money management and an abnormal market filter (extremely helpful these days). This is on my open issues list.
Best,
Frank
Hi guys,
Looking back to 2015, it seems like the reason these strategies behave badly is that it was a “regime change” year using DDN’s original terms. If you analyze it daybyday, you’d see how everything lines up against the strategy(there was another year like that in the past 10 years).
After much experiments, I found that instead of pure theoretical/statistical approach, the regular trading methods (TA, etc…) applied to raw XIV/VXX pair work much better (in terms of returns, SR, MAR, MaxDD), even in 2015.
Food for thought,
Dmitry
A combo RollYield + VRP strategy has performed quite well thus far in 2016: http://www.vixstrategies.com/