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Frequently Asked Questions

Dr K VIX Volatility Model
What is the VIX spiking strategy (also known as VIX spike buy signal)?

As you all know, I have said in interviews and in writings that there is no such thing as a black box. A successful model/strategy must stay fluid as the only constant when it comes to markets is change.

Thus, I always have ongoing strategies I first backtest then study in real-time if the backtests show substantial profits with manageable drawdowns.

One key strategy I have been researching and trading in real-time was integrated into the VVM, known for easy reference as the VIX spiking strategy. This strategy capitalizes on the predictive value of human emotion by buying volatility when it sees event-driven spikes in fear. Major market corrections almost always give warning ahead of the correction, thus both the Market Direction Model and the VIX Volatility Model have always been able to profit handsomely from such events. That said, the past is no guarantee of future market action, so always keep risk under control. 

When it detects a potential setup for spiking volatility, it has been profitable 57.9% of the time (as of this writing on 6/28/16) using the VXX/UVXY ETFs since VXX started trading in 2009. Of course, the strategy misses many softer spikes, but only focuses on the best setups. Gains have typically ranged between 14% and 44% though with one outlying gain at 108% (8/20/15: bought UVXY near the close, 8/24/15: sold UVXY at open).

PROFIT TAKING RULES: The UVXY profit taking rules activate should profits exceed a certain threshold. This acts as a trigger to let profits run but stops are kept very tight. The threshold is contextual to market conditions but seeks at least a 12-18% profit. The numerous boldfaced entries in the results table show when the profit taking rules were activated for either this strategy or on a normal buy signal.

The greatest loss for the VIX spiking strategy stands at 13.6% which is where the trade was closed out. The worst intraday unrealized loss stands at 15.5% as it was never sold at that level. A maximum fail-safe loss of 16% is always in place. Outside of this loss, losses tend to be contained to within 10%. 

Note, one of our reports incorrectly stated "While the trade was live, the intra-trade losses could be as much as -22%." This was in reference to the 22% gap lower that occurred from the 6/23 close to the 6/24 open after the shocking Brexit outcome in the UK (the total loss was 26.8%). This loss was not reflective of the VIX spiking strategy which was triggered on 6/24/16. Further, the rebuying strategy implemented in September 2016, so the model does not get sidelined while the market moves higher, reduced this 26.8% loss to 12.2%. 

While the numbers look impressive, this VIX Spiking strategy is by no means any sort of holy grail but does greatly boost profitability in VVM.

Published: Jun 28 2016, Modified: Nov 20 2016