Since I am still playing a little bit of catch-up today, I am going to piggy-back on some third party content for today’s post. Specifically, I want to introduce some ideas from MarketSci.com on how to use the VIX to trade the SPY. In a three part series which I have linked below, MarketSci lays out three systems which use the VIX to time SPY trades. These include a long-term system using a 186 day VIX SMA which Barron’s cited in December 2006 as being developed by Credit-Suisse; an 11 day EMA-SMA VIX crossover system; and an 11 day EMA-SMA system which utilizes both the VIX and the SPY as triggers:
Part 1: Long-term Trading with the VIX – 20% deviations from the 186 day VIX SMA
Part 2: Short-term Trading with the VIX – an 11 day EMA-SMA VIX crossover system
Part 3: Our Spin on Trading with the VIX – a combined 11 day EMA-SMA VIX and SPY system
In many respects, these approaches are the SPY complement to the VIX mean reversion plays that I blog about on a regular basis in this space. Of course, unlike the VIX, trading the SPY has the benefit of being able to go long or short the ETF, use 2x leverage long with the SSO or short with the SDS, and use options on the underlying.
So far I have shied away from discussing the VIX as a market timing tool, but as I have increasingly become convinced of its applicability in this area, expect to hear more from me on this in the future.