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Monday, July 15th 2019

What To Do When The VIX Is This Low

The VIX is 12.5. How did trading strategies do including futures and options, long stock, calls, puts, spreads did best in backtesting at these VIX levels.

Summary

With the VIX at 12.5, this article explores various trading strategies, including buying VIX futures, VIX calls, SPY OTM puts, SPY calls, a SPY 1x2 put backspread, a SPY straddle, UVXY, and buying SPY outright. Backtesting shows that buying VIX futures has the best returns, but trading them can be tricky.

With the VIX hovering around 12.5, we looked at how various strategies have worked in the past when the VIX was this low.

Idea 1: Buy VIX futures.

Being unable to buy the VIX cash, what is the best alternative? The problems with buying VIX futures are these:

  • They usually trade at a premium to the cash when you are buying and you lose money on the roll yield due to unfavorable VIX term structure.
  • The futures usually trade at a discount to the cash if you sell when the VIX is high.

It would be great if you could buy and sell the VIX cash spot price! Here would have been the results:

 

 

Unfortunately, you have to buy the futures. Here's an example of the futures trade that triggered an entry on 2019-04-12 that exited on 2019-05-07 for a simulated spot profit of $885.98.

 

On 4/12/2019, even though the cash was 12.08, the June future was 16.12 (we calculate an implied future for each expiration), July future was 16.12, Aug 16.39 and Sep 16.67. On the exit date of 5/7/19, with the VIX cash at 20.94, the futures were in 'backwardation' where they were below spot, with the June at 18.42, July 18.25, Aug 18.02 and Sep 18.06. Simulating the entry and exit for each of the futures the best return was the June at 18%, July 13%, Aug 10% and Sep 8% even though the cash was up 73%!

Let's look at some other alternative strategies.

Idea 2: Buy VIX Calls

Buy VIX Calls if the VIX goes under 12.5. 30 days to expiration (DTE) 30 delta calls held to expiration does poorly with a -13.07% Annual Return. Our annual returns are based on profit/stock price, slippage and commissions are considered as explained here.

Idea 3: Buy SPY OTM Puts

Buy SPY OTM puts if the VIX goes under 12.5. I chose a long term 1-year put with a low delta of .05 returned a -0.04% annualized return.

Idea 4: Buy SPY Calls

Buy SPY cheap calls and delta hedge. I backtested buying 6-month OTM 0.05 delta calls, delta hedging every 5 days when the VIX was under 12.5 and exit the position when the VIX went above 17.5. This returned -0.03% annually.

Idea 5: Buy a SPY 1x2 put backspread

Buy a SPY 1x2 put backspread. I used a short 0.40 delta put and two long 0.20 delta puts at 45 days to expiration in the backtest, and entered the spread when the VIX was under 12.5 and held the position to expiration. The strategy returned -0.6%.

Idea 7: Buy a SPY straddle

Buy a SPY straddle when the VIX falls below 12.5. We tested the 30 DTE hold to expiration which returned 0.27%.

Idea 8: Buy UVXY

Buy UVXY when the VIX goes below 12.5 and exit when the VIX goes above 17.5 returned -4.01%.

Idea 9: Buy SPY

Buying the SPY outright when the VIX falls below 12.5 and exit when the VIX goes above 17.5 returns 1.84%.

Summary

Out of these nine ideas, the VIX futures has the best returns, but trading those can be tricky.

 

 

 

Disclaimer:

The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.

All opinions are based upon information and systems considered reliable, but we do not warrant the completeness or accuracy, and such information should not be relied upon as such. We are under no obligation to update or correct any information herein. All statements and opinions are subject to change without notice.

Past performance is not indicative of future results. We do not, will not and cannot guarantee any specific outcome or profit. All traders and investors must be aware of the real risk of loss in following any strategy or investment discussed herein.

Owners, employees, directors, shareholders, officers, agents or representatives of ORATS may have interests or positions in securities of any company profiled herein. Specifically, such individuals or entities may buy or sell positions, and may or may not follow the information provided herein. Some or all of the positions may have been acquired prior to the publication of such information, and such positions may increase or decrease at any time. Any opinions expressed and/or information are statements of judgment as of the date of publication only.

Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. In addition, certain trades may result in a loss greater than your entire investment. Always perform your own due diligence and, as appropriate, make informed decisions with the help of a licensed financial professional.

Commissions, fees and other costs associated with investing or trading may vary from broker to broker. All investors and traders are advised to speak with their stock broker or investment adviser about these costs. Be aware that certain trades that may be profitable for some may not be profitable for others, after taking into account these costs. In certain markets, investors and traders may not always be able to buy or sell a position at the price discussed, and consequently not be able to take advantage of certain trades discussed herein.

Be sure to read the OCCs Characteristics and Risks of Standardized Options to learn more about options trading.

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The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors. For more information please see our disclaimer.
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