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Frequently Asked Questions

Dr K VIX Volatility Model
The model had a big one-day loss. What is the news?

The model switches signals depending on a variety of conditions. News on the model is generally kept to a minimum as I have found over time that such news serves as 'noise' and often can cause one to override the model on a false basis.

Keep in mind the model can be sitting with a sizeable gain such as 10-20% on a sell signal only to see it reduce back towards breakeven in a matter of a few days. The market could have a couple of sharp down days in a row where volatile ETFs such as XIV could easily reverse their gains. A fail-safe would kick in to minimize any loss so at worst, the trade would be closed roughly near breakeven.

Q: Why cant VVM just switch to cash ahead of such an event?

A: Both real-time and backtests have shown the model maximizes its profits by NOT
trying to pick tops or bottoms. VVM can at times switch to cash before such a drop as
it has done at times, but that form of insurance comes at a cost. VVM walks the
tightrope well as it often avoids getting pushed prematurely into cash while
protecting the downside by switching out of its signal if necessary.

 

Of course, each member may wish to have their own maximum permissible loss to each trade they initiate. This would apply to both stocks and ETFs and would depend on one's personal risk tolerance levels.


Published: Mar 27 2017