Wednesday, November 21, 2012

Yes, Yes You Can Trade with the VIX- A Preview (updated)

A while back (originally posted here), I discussed the idea of using the CBOE Volatility Index (VIX) as a warning gauge- i.e. selling or avoiding stocks when the measure was low and buying stocks when it was high. Essentially I showed that this was a lousy strategy, and the performance figures bore this out.

However, I am happy to say that I was wrong. Yes, yes you can use the VIX to trade stocks effectively. I plan on providing more details following the Thanksgiving break, but here are two performance charts based on a simple strategy I built using the VIX data.

The first shows the performance of the S&P 500 (blue) and a VIX-based timing indicators (pink) starting from early 2001 through the present.


The second shows the S&P 500 and the VIX-based portfolio using an alternative start date in the beginning of 2009.

Update- I have provided further details into this study, which can be found here.

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