tag:blogger.com,1999:blog-2113962169078514034.post4501662481399080072..comments2014-09-18T05:49:10.176-05:00Comments on Third Eye Market Analyst: Fair Volatility (VIX) Estimate Model & Indicator Part I, 8-19-13thirdeyehttp://www.blogger.com/profile/02623637729627755196noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-2113962169078514034.post-55735781719921685462013-08-19T22:55:43.956-05:002013-08-19T22:55:43.956-05:00@ContangoMojo. In general, that is the case. But...@ContangoMojo. In general, that is the case. But what is more important is the trend of realized volatility. For example, since January 2008, if we followed the rule--if Realized Volatility (RV)on SPY was greater than its value 11 days ago buy front month VIX futures, if RV < than its value 11 days ago, sell VIX futures, the result would have been a hypothetical $100k account going as high as $2.2 million as of March 2012. However, since March 2012, the performance of this simulation based on this simple rule would have been consistently terrible. The $2.2 million account would now be worth $475,000. The reason for the success and failure of this trading rule probably has to do with the observation that since the financial crisis of 2009, changes to Realized Volatility often led implied volatility. However, from sometime in 2012, changes to implied volatility or VIX has been leading Realized Volatility. In general, it is dangerous to follow rules based on a lagging indicator. This is why most technical indicators do not work as trading rules.<br /><br />In designing the FVE model, I incorporated some leading factors or at least factors that took into account possible changes to the direction of VIX, which is the "Fear Factor" portion of the model.<br /><br />Ideally, a volatility model would accomplish both 1) alert you to the future trend of volatility and 2) let you know if volatility is cheap or expensive. A volatility TRADING model would accomplish the first well. A volatility PRICING model would accomplish the second well. With FVE, I tried to accomplish both.thirdeyemarketanalysthttps://www.blogger.com/profile/02623637729627755196noreply@blogger.comtag:blogger.com,1999:blog-2113962169078514034.post-17581675262781082712013-08-19T21:13:48.123-05:002013-08-19T21:13:48.123-05:00Thanks for the article. The greeks are new to me...Thanks for the article. The greeks are new to me as an options novice, but your example on how to hedge delta has helped to give me a bit better understanding. <br /><br />Now, what would be a good use of your simple realized vol calculation?<br /><br />IF "realized vol" on SPY is lower than VIX, sell VIX futures or ETPs? If realized vol on SPY is greater than VIX, buy VIX futures? @ContangoMojohttps://twitter.com/ContangoMojonoreply@blogger.com