VIX Activity and Moving Average Envelopes

I have been receiving quite a few questions about the VIX lately. These are usually of the “where is it going?” or “what does it mean?” variety, but also quite a few from the do-it-yourself crowd who want to know how to best chart the VIX.

Though it may not always appear to be the case in this space, I am a big proponent of keeping things simple. The chart below is one simple approach to thinking about the VIX. The chart utilizes three different moving average envelopes to track where the VIX is relative to its 10 day simple moving average. Unlike Bollinger bands, which expand and contract according to recent volatility trends, the moving average envelopes define fixed percentage deviations from the moving average. In the case of the chart below, the dotted green line in the center is the 10 day SMA, the solid green lines represent a 10% moving average envelope, the bold dark blue lines mark the 20% envelope, and the dotted red lines are 30% above and below the 10 day SMA.

In terms of interpretation, consider that the VIX spends of most of its life between the 10% envelopes (e.g., late August, last few days) and generally strays only briefly out of the 20% envelopes before being pulled back by mean reversion. Of course the recent historic highs in volatility had the VIX above the top of the 20% envelope for almost all of September and October and then dramatically reversing to below the bottom of the 20% envelope last week. For any time other than the recent market activity, the 30% envelopes are superfluous. Historically, these are breached about once per year and almost always when the VIX spikes up.

[chart courtesy of StockCharts.com]

Comments

[vovay45:]

Forget that moving average envelops .
MA Should be 1.
Try this simple system for free:
Buy next day at Limit today's Low-10%
SellShort next day at Limit today's High+10%
InstallTime Based Exit(5);
InstallProfitTarget( 5% );

Current system:EPA_V
Symbols list VIX
Position Sizing
Initial capital 100000
Maximum Open Positions 2
Position size 50% of equity
From date 01/09/2008
To date Now

Statistic

Range 2008-Jan-09 - 2008-Nov-12
Overall performance
Total % gain/loss 127.93 %
Total gain/loss 127928.81
Annualized pct gain 165.47 %
Starting capital 100000.00
Ending capital 227928.81
Closed pos gain/loss 127928.81
Max gain per pos 15948.53
Max loss per pos -10134.60
Average gain/loss per pos 4568.89
Average % gain/loss per pos 6.12 %
Max % gain per pos 20.52 %
Max % loss per pos -12.69 %
Risk etc...
Exposure 11.95 %
Expectancy 4568.89
Ulcer index 3.14
Drawdown
Max drawdown -17441.52
Max drawdown % -11.73 %
2008-May-15
All Trades
Total Trades 28
Closed trades 28
Open trades 0
Winning Trades
Winning closed trades 26
Winning open trades 0
% winning closed trades 92.86 %
% winning open trades 0.00 %
Average gain per winning pos 5608.66
Losing Trades
Losing closed trades 2
Losing open trades 0
% losing closed trades 7.14 %
% losing open trades 0.00 %

tradery.com/runfix...

2008 Nov 12 11:33 PM