Bankable ETF Strategy: VIX Rotation
I am going to present a different kind of swing trading strategy this time using the CBOE Volatility Index VIX to trade S&P 500 ETF (SPY) and Dow 30 ETF (DIA).
CBOE VIX is a measure of the implied volatility of the index options on the S&P 500 cash index. Traders give it the nickname "fear index" as it shows the traders’ expectation of volatility in the stock market over the next 20 to 30 days time span. The special characteristics of VIX make it a perfect candidate for the construction of breadth based trading models.
Following chart shows the approximate net points gained on SPY since 1996.
Notable characteristics of the model:
1. Impressive overall performance
2. It does not produce much profit when VIX is locked in tight range
3. No significant drawdown from #2 implies driving bias is very strong
4. Performs well in both long and short trades
5. Average duration per trade is about 6 trading days
6. Combined win rate stands at around 66%
7. Stable win rate across many years
8. As good as price based models
9. Works equally well on DIA due to the high correlation between SPY and DIA.
10. To control risk from news shock, a 2.5% stop can be employed. The performance on the model with stop is about the same as the raw model as the 2.5% stop is rarely triggered.