WHAT STOCKS DO WE TRADE?
Our signals apply to long volatility ETPs (VXX, VIXY, UVXY, UVIX, VXZ) and short volatility ETPs (SVXY and SVIX).WHAT SIGNALS DO WE PROVIDE?
Our algorithms generate buy, sell, or hold signals are sent to subscribers at the close of each trading day (4:31pm ET). Preliminary notifications are also emailed at 3:47pm.The end-of-day indicator values are published to a set of gauges on our Daily Forecast page and emailed to subscribers. Subscribers can also check our Intraday Indicators page to view how the values are trending throughout each trading day.
If any indicator changes direction and triggers a buy or sell signal, automated email alerts are sent to any subscribers who wish to receive that alert.
HOW DO THE ALGORITHMS WORK?
We currently offer three primary strategies that apply to trading VIX futures ETPs. Each of these strategies takes a different approach for maximizing gains. Because no single strategy is perfect and the market is inherently unpredictable, we combine the three strategies simultaneously to compensate for weaknesses within each of the strategies.
Indicator Conventions:
- A positive value indicates a buy signal for volatility (VIXY, VXZ, UVXY)
- A negative value indicates a "short volatility" (buy signal for SVIX, SVXY)
Strategy Component #1: "VXX Bias "
- Our Bias strategy is constructed using VIX futures data along with a component which monitors underlying momentum changes in the term structure.
- Our VRP strategy is a variation of a commonly used indicator for measuring forward implied volatility versus actual volatility.
Strategy Component #3 "VIX Gamma Exposure (GEX) "
- Our VIX GEX indicator measures Market Maker Gamma Exposure for VIX, as measured by the sum of the net gamma across all VIX options contracts.
- Our VIX GEX indicator measures Market Maker Gamma Exposure for VIX, as measured by the sum of the net gamma across all VIX options contracts.
Combined Strategy: "VRP+VXX Bias" strategy
- We buy SVIX or VIXY only when the VXX Bias and VRP signals agree on the direction for the trade.
- When they do not agree, the portfolio is in cash (approximately 15% of the time).
- When they do not agree, the portfolio is in cash (approximately 15% of the time).
- Investors can choose to include the VIX GEX indicator as well by either reducing position exposure by half when it does not agree with VRP+VXX Bias, or by moving to cash when all three indicators do not agree on direction.
WHAT IS OUR PHILOSOPHY?
The best approach to trading is a quantitative and process-driven approach. Each of the indicators is a signal-based strategy which allows us to identify and trade along with directional trends. By using signal-based indicators we are able to remain objective in our trading and minimize errors that arise from making emotion-based decisions.
Our automated emails are sent daily to allow any DIY investor to mirror our strategies. Following our strategies simply involves trading securities in the same direction of the indicator, as identified in our emails.
WHAT IS THE PERFORMANCE OF THE ALGORITHMS?
In February 2016 we began automated trading of our VRP+VXX Bias and VXX Bias signals on a Collective2's platform. The current performance of the indicators using third party verification is shown below and posted to our Results page.
VRP+VXX Bias ("Trading Volatility 1"):
VXX Bias:
TRACKING OUR FORECAST HISTORY AND FULL BACKTESTING
The indicator values for the most recent six months is always displayed on our Daily Forecast page.
Annualized percent gain/loss in full backtested results for each of our strategies used with SVXY & VXX are shown in the following table.
For benchmark comparison purposes, a portfolio consisting of a "buy and hold" approach in SVXY is included in the right column (Note: Daily prices for VXX and SVXY prior to fund inception have been derived from actual VIX futures data for the purpose of maximizing the length of the lookback period.
--> Model returns presented from years 2007 through 2014 utilize backtested data of all indicators.
--> Model returns presented from years 2015 through 2020 reflect hypothetical performance using actual indicators sent to subscribers.)
Strategy statistics for each of the indicator's monthly returns:
For detailed historical backtests of our indicators, please see the links at the bottom of our Subscribe page.
Note: If you are new to this area of the market, you can read about how volatility works and why it is possible to forecast volatility ETPs in our e-book, Fundamental Concepts and Strategies for Trading Volatility ETPs.
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Hypothetical and Simulated Performance Disclaimer
The results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Backtest results do not account for any costs associated with trade commissions or subscription costs. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for SVXY, VXX, VXZ, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.
--> Model returns presented from years 2007 through 2014 utilize backtested data of all indicators.
--> Model returns presented from years 2015 through 2020 reflect hypothetical performance using actual indicators sent to subscribers.)
--> For third-party tracked returns using our automated signals from 2016 present please see our Results page. [Note: Actual results from 2016 - March 2017 utilized XIV, which was a -1x leveraged ETP, vs the -0.5x of the currently available SVXY.]
Disclaimer: Trading these strategies is risky. Please read our Terms of Use for additional disclaimers.
The annual gain/loss data can be visualized in the graph below (data through December 2020).
Given the graph above it becomes more apparent how strategy performance can differ depending on the specific market conditions and why we believe it to be important to take a dual strategy approach. Specially, the VXX Bias strategy has an advantage in handling periods of moderate drawdowns and sustained periods of backwardation. Meanwhile, the VRP strategy is better with choppy markets and periods of gradually increasing volatility when VIX futures are in contango. The two of these together provide more consistent returns than using just one strategy alone, although each one is vastly superior to a buy-and-hold approach with SVXY.
While the annual return of our VRP+VXX Bias strategy exceeds an average of 50% per year, monthly performance can be volatile. The table below provides monthly returns of the VRP+VXX Bias strategy.
Similarly, the table below provides the monthly returns for the VXX Bias strategy.
Strategy statistics for each of the indicator's annual returns:
Disclaimer: Trading these strategies is risky. Please read our Terms of Use for additional disclaimers.
The annual gain/loss data can be visualized in the graph below (data through December 2020).
Given the graph above it becomes more apparent how strategy performance can differ depending on the specific market conditions and why we believe it to be important to take a dual strategy approach. Specially, the VXX Bias strategy has an advantage in handling periods of moderate drawdowns and sustained periods of backwardation. Meanwhile, the VRP strategy is better with choppy markets and periods of gradually increasing volatility when VIX futures are in contango. The two of these together provide more consistent returns than using just one strategy alone, although each one is vastly superior to a buy-and-hold approach with SVXY.
While the annual return of our VRP+VXX Bias strategy exceeds an average of 50% per year, monthly performance can be volatile. The table below provides monthly returns of the VRP+VXX Bias strategy.
Similarly, the table below provides the monthly returns for the VXX Bias strategy.
Strategy statistics for each of the indicator's annual returns:
Strategy statistics for each of the indicator's monthly returns:
For detailed historical backtests of our indicators, please see the links at the bottom of our Subscribe page.
Note: If you are new to this area of the market, you can read about how volatility works and why it is possible to forecast volatility ETPs in our e-book, Fundamental Concepts and Strategies for Trading Volatility ETPs.
STRATEGIES FOR TRADING VXZ
Similar to the VXX Bias, the VXZ Bias measures headwind/tailwind of mid-term securities. It is also generated based on the shape of the term structure but includes an adjustment based on the shape of the front end of the VIX futures term structure. The gauge's scale is also normalized on a scale of -10 to +10, with the majority of values falling between -2 and +2 and a neutral zone at +/-0.5.
- A positive value for VXZ Bias indicates a buy signal for VXZ, while a negative value indicates the sell signal for VXZ.
MORE DETAILS ON THE VXX BIAS INDICATOR
The VXX Bias provides a holistic view of the directional force of VXX, and can be conceptualized as a headwind or tailwind for the security. It is determined by the roll yield of first and second month VIX futures (learn more about the roll yield in our e-book) along with momentum and state change inputs. The gauge values are on a scale from -10 to +10, with a more negative reading indicating a stronger negative bias (headwind), and a more positive reading indicating a stronger positive bias (tailwind). The gauge's range covers +4 and -4 standard deviations of values since March 2004. Therefore, you can generally expect readings for the VXX Bias to be between -3 and +3.
Historically there have been very wide gaps between first and second month VIX futures leading to extreme readings. On the negative side of the VXX Bias gauge, we've hit as low as -5, most recently in March 2012 when front month VIX futures were at 16.15 and second month was up at 21.6. On the positive side of the gauge we've had readings above 10, notably in Oct 2008 when front month was at 64 and second month was 42.9. Each of those extreme readings translate into very strong directional moves for VIX ETPs, and someday we may see them again.
Because VXX is the inverse of the funds XIV and SVXY, the VXX Bias forecast applies to those securities as well, but the negative needs to be changed to a positive or vice versa.
Further documentation of backtested results using the VXX Bias strategy is available in this post.
Further documentation of backtested results using the VXX Bias strategy is available in this post.
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Hypothetical and Simulated Performance Disclaimer
The results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Backtest results do not account for any costs associated with trade commissions or subscription costs. Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for SVXY, VXX, VXZ, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.
