Favorite Volatility Strategy

C2
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I think there is some truth in both arguments about the stock market’s adjustment to profitable strategies.

First, it is possible that a more neutral hedge against risk will be developed than XIV, VXX, & UVXY. That could make these VOL strategies degrade or fail.

But so long as XIV & VXX are traded heavily (and they are currently among the most heavily traded securities every day), they are structured to give large positive or negative returns in the long run. As the markets become more efficient, these ETNs should trade at a significant discount or premium relative to the indicated intraday value (based on the underlying futures). But when the CBOE releases an asset value for XIV and VXX every minute, it will be hard for traders psychologically to pay big premiums or discounts v. the NAVs. Yet eventually, there will be at least some move in this direction. So far, there is no such substantial, consistent market pricing adjustment.

Because of the high profitability of the VOL strategies, I think the market will eventually at least partially adjust by one of these two work-arounds:

  • (1) a more neutral ETN that will kill XIV & VXX trading, or
  • (2) the development of huge premiums or discounts on XIV & VXX prices.

After all, if something can’t last forever, it won’t.

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@KarlA exactly thats my intention. This is why I don´t shoot for 100% per year but focus on developing stable systems that can deliver relatively consistent returns in the 20-40% area with digestible drawdowns.

@QuantitativeModels I´m fully aware of the XIV termination condition and designed my system to not go bust in that event. However, we will have to wait and observe the actual outcomes if that event ever triggers. (Would not have triggered in 2008 which was already a nice crash…)

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Good thread today :slight_smile:

@QuantitativeModels Yup, that’s an issue. Always scale your participation accordingly. I would hope that anyone with a vol strategy knows this, reads prospectuses and Harwood regularly, etc. Although VIX futures weren’t around in 1987, I was, and I’m about near to positive that my strategy would have gone long vol during by Thursday or Friday of the week before… and I’m sure my strategy isn’t alone there. It was bad. So I think most of us would have dodged Black Monday of 1987 in XIV. So now we’re talking about hedging and protecting from a Black Swan that hasn’t been seen in even longer than 30 years. Fine… if you want your strategy to do that for you, choose those strategies. I prefer to balance my own investments according to my own risk-reward preferences, and include a higher risk, higher return strategy where all the stops are pulled, full steam ahead. That’s what my Battle Axe Volatility strategy strives for. 2008 would have been my best year, based on backtesting.

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I think the solution for an investor is not to make VOL more than 20%-25% of your overall portfolio, Then the DDs are survivable. Remember, in 2008-9 the SP500 went down 55%; even those fully invested recovered, and I was fully invested for only a portion of that DD.

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Exactly @QuantitativeModels, investors should apportion their portfolios wisely into diverse assets, not too much anywhere, etc.

And the difference between a 55% drawdown with an SP500 index fund and a good volatility strategy is that the vol strategy can recover much more rapidly than any index fund (much higher Calmar ratio of long-term CAGR to max drawdown ratio). SP500 took until 2013 to climb out of that 2009 hole, but backtesting of vol strategies through this period (using synthetic VXX/XIV prices from futures) were completely different: XIV-only strategies could have been making new highs by the second half of 2009, while VXX/XIV switching strategies reached their lows back in 2007-08 and were making new highs in late 2008 with drawdowns in 2009 well above the lows from a year earlier.

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I am new here and this is my first post.

I trade volatility almost 3 years now and I KNOW that without risk management you’ll gone in the first spike in the volatility. I subscribe to C2 because one of my friends subscribed to a good volatility strategy and after I checked and rechecked the risk management and after I spoke with the programmer I decided to subscribe as well to the same strategy.

Basically I found out that only 2 volatility strategies in C2 has a good risk management:
VIXTrader and Smart Volatility Long.
They are both have good performance although I subscribed to only one of them because I like low DD.

All the rest strategies are looking like gamblers and they will not stay long here…:joy:

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28

Hi Ulrich,
I can see the risk management of Smart Volatility Long where the developer hedges the risk with buying call options on the VXX, by the way, the same applies to Smart Volatility Short, but where to you see any risk management for the system VIXTrader, let’s they in case of an overnight black swan event?

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Risk management is a whole theory that tries to give answers to various risks but you still in risk when you trade…I think that if you expect that October 1987 will appear tomorrow then you should not go into volatility strategies at all…

What I like about VIXTrader is the fact that its strategy consist of more than 40 different strategies each of which manages its risk and above all there is a major risk management. This idea leads to full exposure to the market in situations where the risk level is very low and reversed. It means that the DD is very low and the average exposure to the market is low as well. This is not influence the results too much if any…These 3 things are VERY important for me and I know that I can live with that on the long run.
In my opinion none do that as he done it including the Smart Volatility Long strategy which is good as well as I said before…

In days of advance known volatility the system holds a very small position or totally in cash. I also saw buying VXX when ever the volatility start to rises.

I like the idea of low risk and high results…

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In other words, consult your crystal ball first.

31

Not that it really matters (because the “proof is always in the pudding,” as they say —in this case, the system’s performance versus the risk and time taken to acquire such a performance is all that should matter)…but can’t a system developer/trader say anything and put whatever they want in the system’s description as a means to establish credibility and confidence from its potential subscriber?

Whether it is "machine learning, “professionally managed and academically [PhD] evidenced”, “40/56 strategies inside” etc…is that all it takes to truly attract subscribers after a system has had a few positive solid runs? I have seen quite a few systems periodically “inflate” the description of the system after a good a run or two as a means to make the system appear more robust than it might actually be. Hmm…I guess I have been missing the boat this whole time and wrong with my stupid K.I.S.S. (Keep It Simple Stupid [Smarty] philosophy.

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32

It’s just marketing. Ph.D. evidenced, computer machine learned, turbo crystal ball utilization, etc. etc.
Time discovers truth.

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I guess there is not much TRUTH in marketing these days. Dang…no wonder I am not making any money like these other guys. :wink:

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34

My favorite volatility strategy is the one I run, Volatility Returns (https://www.collective2.com/details/101429306). Is that a shameless plug? Well, not really, because I trade it myself 100% TOS so I feel entitled to a vote. In other words, I’m an investor and I put my own money where my mouth is. And, it’s not just $4,000 or even $40,000 of my own money; it’s $400,000+ of my own money. Also, it’s at a 380%+ annual return as of May 1, 2017, which I think is worthy of a vote for favorite volatility strategy.

Here are a few other reasons why Volatility Returns is my favorite strategy:

  1. Trades are completely based on an algorithm and the strategy has no subjective inputs.  I don’t think any strategy leader (whether on C2 or elsewhere) who follows their own thoughts, intuition, etc. is worthy of being followed.

  2. It only trades XIV and UVXY, both of which trade millions of shares so slippage/liquidity are likely not going to be terribly problematic.

  3. Volatility Returns rewards subscriber loyalty.  Even though the price is now $59 (and increasing to $99 before open of trading on May 2, 2017, so get the $59 rate before then), those who signed up at $29 still have that rate.

  4. Volatility Returns attempts to do well during bear, bull and stagnant markets. 

  5. The strategy leader (me) has been trading successfully for 22 years and this is the best strategy I’ve ever seen; that’s why I follow it TOS 100%.

  6. Trades occur near the end of the market close.  There are volatility strategies that trade at market open the next day and their returns suffer drastically and the risk increases tremendously.  I know this because I’ve run the numbers.

There have been quite a few interesting comments in this thread on risk management. Volatility Returns does not use stop losses nor does it purchase/sell options to hedge. It is a strategy aimed at maximizing returns, plain and simple. If someone is looking for a volatility strategy with the main focus on risk management, Volatility Returns is not for them. Individual subscribers are certainly welcome to use their own risk management tools but that is an individual decision. To me, one of the best risk management tools is diversification and not investing too much money in any one strategy. Only the most naïve investor in the world can expect a 380% return (as of May 1, 2017) without corresponding risk.

Having said that, since 2007, through backtested data, the highest drawdown on any trade for Volatility Returns is 33.5%. For context, that’s through the (1) financial crisis of 2007-2009, (2) European Sovereign Debt Crisis/US Debt Downgrade of 2011 and (3) Flash Crash in August 2015. And, of course, the algorithm that Volatility Returns trades, attempts to make substantial returns during periods of high volatility. The backtested returns show that some of its best returns occurred long UVXY during exceptionally volatile periods.

Will Volatility Returns still be around in 1 year, 2 years, 5 years, 10 years? I believe so and trading 100% TOS makes my conviction clear.

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35

Seriously, if you trade 100% this system on 400K and expect even a 25% return, why bother revealing your strategy to people that may include big funds in exchange for some few thousand dollars of extra income (at best)? And how come you started it on C2 after 2 years of very small gains?

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There are quite a few volatility strategies on Collective2.
I prefer those with TOS-certificate and good backtest results.
Of course we all know that a backtest is no guarantee for future profits.
But it shows that the system has been tested by the strategy creator and it did work in the past.
An additional TOS-certificate proves that the strategy creator really believes in its own strategy.
Of course diversifing your account with different volatility traders will help to smooth your account performance.
And I also sympathize with marekj’s post

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But who knows when the next market correction will happen?
So until then… here are my favourite volatility strategies.
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I do like David Juday’s “Smart Volatility Long” strategy very much.
Trading only long and using options to hedge, it’s one of the “safest” volatility strategies on C2.
Also recomendable is the riskier “Smart Volatility Short” strategy, which uses options for security as well.
Both strategies are TOS. Risk/Reward is amazing. In the first year they were 100% & 180% in profit.
David is very helpful and responsive and even provided a webinar for subscribers.

I also like C.J.'s “Fast Nickels” strategy.
It trades only long and uses 75% allocation, therefore it’s also one of the “safest” volatility strategies on C2.
More risky is his “XIV Timer” stregy wich goes 100% long or short on XIV & SVXY.
“XIV Timer” is TOS, “Fast Nickels” is not, not sure why.
But both strategies show very promising long-term backtests.
So far the performance was 90% & 100% since Sept.2016, despite the negative performance in April 2017.
C.J. is very communicative and you will get frequent updates & good explanations on the trades and the system.

“QuanTimer VIX” is also interesting. So far it has been solid with a 82.6% annual return & 18% DD, but no TOS.
If you want more performance you can follow “Quantimer VIX-L”, which is leveraged and trading short.
With an allocation of 165% “VIX-L” it’s more risky, so be sure to adapt/reduce the C2-scaling to your portfolio.
They also have a nice webpage > www.quantimer.net with lots of backtests.
Ryan of Quantimer.net is very helpful and responsive to subscribers.
https://www.collective2.com/details/100578638
https://www.collective2.com/details/104406539

“Volatility Returns” is another volatility system which is TOS-certificated.
The system doesn’t trade often. Backtests range with a yearly performance between
-17% (in 2007) and +1963% (in 2010), so it doesn’t show consistent yearly backtest results.
But be careful here, such astronimic 4-digits results are only possible with 200% XIV allocation.
There is no mention of that in the description > (as warning for new subscribers!).
Because of this double exposure, 100% autotrade-scaling is (in my opinion) not recomended.
It’s risky to trade more money that you own!
Followers are strongly recommended to downgrade scaling of this strategy to their own portfolio.
For example, I do use only 2% autotrade-scaling with this volatility system,
but it still has been very profitable by making more than 2K in the last 2 weeks.
There was a webpage with backtest results before, but it’s closed now. Not sure why.

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Other C2 volatility traders on my watchlist, which I’m not subscribed (yet).
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“VIXTrader” looks also like a rock solid long-term volatility system.
The 62.5% profit with only 7,5% DD is quite amazing, but no TOS.
Backtest results do also look positive in long terms.

“Volatility Fusion” is also 100%-TOS certificated and looks like a good long-term volatility system.
In the fist six months it made 50% profit. Backtest results do also look good in long terms.

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Maybe two other possible future candidates… (but wait a few months!)
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“Trend Countertrend” had a good performance so far. But there are no backtest as well and no TOS.
So only time will tell…

“Ultron VIX IRA Fund” could be also a interesting system. Of all the strategies offered by Ultron,
this one seems to be the most conservative one. Beeing long-only and suitable for IRA-accounts.
But Ultron dosn’t provide a backtest and there is no TOS.
One has to invest more than the recomended minimal 5000$ here, to equalize the high 249$ monthly fee.

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37

That’s a good summary of most of the top volatility strategies. Backtest are definitely important for a VIX strategy. Though if a backtest is showing returns that are too good (> 300% / year) then the model is probably overfitting the past data.

Overfitted models with too many parameters don’t tend to generalize well with new unseen data (these models are too biased to that specific past data set which is never going to be repeated exactly.) These models usually crash in live trading. The more simple models with reasonable back test returns will more likely give a similar performance in the future. An example of overfitting would be to buy vxx in any year that ends in 8, because in 2008 the market crashed. Now that would do quite well in backtesting! Don’t try it in 2018!! This is quite an obvious example, but models that are full of parameters are basically doing the same thing.

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38

VXX trading and big losses.
I feel quite safe with Smart Volatility Short in this time of the year…
Volatility Return is another case. I invest with them. Because of the seasonal aspect of VIX, I trade them from juli till november for a less amount (50%). And I change Smart Volatility from short to long (less risk and les MDD).
So I think I can invest about 50% of my account in volatility.
25% in my system Anna’s Stocks https://collective2.com/details/95384675
And I’m looking for a system for the other 25% (with low correlation)

VIX Seasonality.png873×573 150 KB

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39

@TonWinter,
Fascinating graph! I don’t know exactly what the Y-axis scale is, but it seems a little less a jump from green arrow to red once you look at the scale and see it’s going from ~19 to 24 and not from less than 1 to 6.

That said, I don’t know why such a graph should impact your allocation to volatility trading… vol strategies should not automatically perform less well during a season when VIX increases. I looked through my own vol strategy (Battle Axe Volatility) backtests for seasonality, and found an apparently random distribution of monthly returns, but with July and October being my two strongest average months, and that particular four month period (July-Oct) being the second strongest of all four month periods. So at least with my vol strategy, such seasonality either doesn’t exist, or Battle Axe capitalizes on the apparent seasonal increase in volatility.

Good luck!

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It is not because of a lower result between the arrows that I intend to avoid (diminish the size of my account) . It is because of avoiding black swans. I think that the greatest hazards will be in periods in which there is already a sensitivity for big volatility. And I think that is between the arrows. When you look at the chart of volatility, you see that the extreme spikes up, are betwee august and october. F.i. august 1998, september 2002; october 2008 and september 20011.
The Y-axis gives the average of the VIX over 25 years.
Have a good day.

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41

Thanks for the clarification on your rationale, I appreciate it. And, of course, you could add October 1987 to the list of extreme autumn events, just a few years before VIX.

My scientist background however, is skeptical that this variability is seasonal at all. Your post spurred me to investigate the raw data (from CBOE). All of the seasonality disappears if only considering VIX values below ~30-35. So if there is a seasonality, it’s not within the normal VIX range, but only in extreme events. Fortunately, extreme events can be looked at individually, to see if the events are related to the time of year (true seasonality) or are simply coincidental with the northern hemisphere autumn. There are only ten years (of 27 from 1990-2016) with events above VIX of 35, so it’s not too onerous a research effort… to my examination so far, this is not true seasonality. Your analysis may be different.

We all draw our investment approaches from different sources and toward different goals. Thanks again for the stimulating post.
Paul

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