Tuesday, July 3, 2007

Using the VIX as a Timing Tool for the SPY

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.


bzbtrader said...

Just my 2 cents but I suggest x2 ETF traders focus on the SDS and ignore the SSO. Fills are faster on SDS and SDS can be played either long or short with no up-tick rule, has approximately 10x the daily volume of SSO and has routine spreads of .01 as opposed to SSO, where spreads are typically .03-.04.

nodoodahs said...

I agree that the VIX has some market-timing potential, but I don't think it has enough to overcome it's primary drawback (that it is basically 75%+ price volatility that must be filtered out), and I think there are better, simpler ways of getting at timing.

That's the primary reason I let the third part of my VIX decomposition series die on the vine.

If I traded options, I might feel differently.

@ bzbtrader: SSO fills, volume, and spreads are important to a daytrader, not so much to an end-of-day analysis swing trader type of market timer. A longer holding period means that shorting SDS eats into returns via margin interest, diminishing its value in faster fills and tighter spreads. Also, someone may be timing in a self-directed IRA and not have access to shorting stocks. There's a time and place for every vehicle ... for your timeframe and style, you're probably right about shorting SDS instead of longing SSO, but that's not for everyone.

DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2023 Bill Luby. All rights reserved.
Web Analytics