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Frequently Asked Questions

Dr K VIX Volatility Model
Please discuss why you made the change to the model on 4-3-17.

VXX started in Jan-2009 thus the returns are backtested from Jan-2009 up until 12-30-15. From 12-30-15 to 11-8-16, VVM lost money as more changes were implemented into the strategy. VVM then shot up +54.3% in real-time from 11-8-16 through 3-17-17 with all the changes in place. Meanwhile, I was testing out a significant change I wanted to implement after about 6 months of non-backtested testing. Keep in mind that 6 months is not a long time. But I was happy to see the profit trajectory from the backtests done from Dec-2010 to Sept-2016 continued at enough of the same rate from Sept-2016 to Mar-2017 in real-time, proving out the backtests, for at least this short 6 month timeframe.

So on 4-3-17 starting with the VVM sell signal, I made the change live on VOSI. Since 4-3-17, VVM has been on a steep drawdown so the 54.3% gains were more than reversed. Had I not made the change on 4-3-17, the model would still be doing very well. But I stick by the change I made on 4-3-17 since the profit trajectory is greatly steepened while the number of whipsaw trades is significantly reduced. The downside is single signal losses and drawdowns are greater.

I am monitoring both the before and after performance of the VVM. If the market keeps throwing gray swans that create more gap downs such as UVXY/Frexit and XIV/impeachment that did not affect the earlier pre-4-3-17 version of the VVM, I would have to revert back to the pre-4-3-17 version. And of course, I'm also monitoring for changes in the market that could make VVM completely untenable since we are in uncharted territory.

Keep in mind VVM has so far not produced sustainable gains as highlighted above. Also, as you can see, past performance of backtested or real-time results is never a guarantee of future performance as the 54.3% gain made under the pre-4-3-17 VVM was reversed in the post-4-3-17 VVM. Also, as mentioned above, 6 months of strong gains is not a long period of time. Please do your due diligence to make sure VVM is within your levels of risk tolerance.

Published: May 25 2017