Comments on: Test of Condor’s VIX-based Trading Strategy http://marketsci.wordpress.com/2008/09/22/test-of-condor%e2%80%99s-vix-based-trading-strategy/ a repository for my research on wrangling these unruly markets Sat, 05 Dec 2009 02:08:44 +0000 http://wordpress.com/ hourly 1 By: marketsci http://marketsci.wordpress.com/2008/09/22/test-of-condor%e2%80%99s-vix-based-trading-strategy/#comment-2420 marketsci Fri, 31 Jul 2009 14:47:12 +0000 http://marketsci.wordpress.com/?p=712#comment-2420 RE to John: glad you were able to get it worked out...thanks for the follow up. michael RE to John: glad you were able to get it worked out…thanks for the follow up. michael

]]> By: John French http://marketsci.wordpress.com/2008/09/22/test-of-condor%e2%80%99s-vix-based-trading-strategy/#comment-2419 John French Fri, 31 Jul 2009 12:29:20 +0000 http://marketsci.wordpress.com/?p=712#comment-2419 Michael, I found what my problem was. I was simply picking data up from my VIX sheet on a row by row basis where I should have been using INDEX()+MATCH() (or OFFSET()+MATCH()) as the Yahoo VIX data does not match their SPX data on a date basis (there are some extra rows for some market holidays). Thanks for the prompt attention though. John Michael, I found what my problem was. I was simply picking data up from my VIX sheet on a row by row basis where I should have been using INDEX()+MATCH() (or OFFSET()+MATCH()) as the Yahoo VIX data does not match their SPX data on a date basis (there are some extra rows for some market holidays).

Thanks for the prompt attention though.

John

]]> By: John French http://marketsci.wordpress.com/2008/09/22/test-of-condor%e2%80%99s-vix-based-trading-strategy/#comment-2418 John French Thu, 30 Jul 2009 16:13:56 +0000 http://marketsci.wordpress.com/?p=712#comment-2418 Michael, thanks for the offer. I will have another look at it after work and if it still looks wrong I will send you what I have. Note I am not using an interest rate if in Cash and am "trading" the SP500 hence there will be differences for sure but not of the manitude I am currently experiencing! John Michael, thanks for the offer. I will have another look at it after work and if it still looks wrong I will send you what I have. Note I am not using an interest rate if in Cash and am “trading” the SP500 hence there will be differences for sure but not of the manitude I am currently experiencing!

John

]]> By: marketsci http://marketsci.wordpress.com/2008/09/22/test-of-condor%e2%80%99s-vix-based-trading-strategy/#comment-2417 marketsci Thu, 30 Jul 2009 15:43:53 +0000 http://marketsci.wordpress.com/?p=712#comment-2417 RE to John: this is a long ago post - would be a real bear trying to hunt down the xls file now. if you send me your code i'll try to diagnose. thanks, michael RE to John: this is a long ago post – would be a real bear trying to hunt down the xls file now. if you send me your code i’ll try to diagnose. thanks, michael

]]> By: John French http://marketsci.wordpress.com/2008/09/22/test-of-condor%e2%80%99s-vix-based-trading-strategy/#comment-2416 John French Thu, 30 Jul 2009 15:33:43 +0000 http://marketsci.wordpress.com/?p=712#comment-2416 Michael, I have coded this using Yahoo data with TA-Lib and I get nothing like the Equity Curve displayed in the article (anything else I have replicated from your articles has been fine). Would it be possible for you to send me the Excel file (presuming that's what you used) when you have a chance? Thanks John Michael, I have coded this using Yahoo data with TA-Lib and I get nothing like the Equity Curve displayed in the article (anything else I have replicated from your articles has been fine). Would it be possible for you to send me the Excel file (presuming that’s what you used) when you have a chance?

Thanks

John

]]> By: marketsci http://marketsci.wordpress.com/2008/09/22/test-of-condor%e2%80%99s-vix-based-trading-strategy/#comment-246 marketsci Sat, 27 Sep 2008 23:19:25 +0000 http://marketsci.wordpress.com/?p=712#comment-246 RE to aleco – I would humbly disagree on multiple points: First, regarding friction. The strategy as I’ve applied it is using leveraged funds (Rydex, ProFunds, and Direxion), not leveraged ETFs. As such, there are no additional slippage or transaction costs to consider. Second, that you could achieve similar returns with a buy and hold approach. Two issues here: First, it’s a misconception that over the long run, double beta funds will produce double the return of an underlying index. Remember, the funds are doubling the daily return of the index, not the long-term return – volatility and the asymmetry of up/down returns will eat away the long-term return of leveraged bull funds. Secondly, you’ve ignored risk-adjusted returns. Can you imagine the drawdowns/volatility of simply buying and holding a double-beta bull fund over the period we studied above? The gut wrenching drawdown of the early 00’s? I shudder to think… RE to aleco – I would humbly disagree on multiple points:

First, regarding friction. The strategy as I’ve applied it is using leveraged funds (Rydex, ProFunds, and Direxion), not leveraged ETFs. As such, there are no additional slippage or transaction costs to consider.

Second, that you could achieve similar returns with a buy and hold approach. Two issues here:

First, it’s a misconception that over the long run, double beta funds will produce double the return of an underlying index. Remember, the funds are doubling the daily return of the index, not the long-term return – volatility and the asymmetry of up/down returns will eat away the long-term return of leveraged bull funds.

Secondly, you’ve ignored risk-adjusted returns. Can you imagine the drawdowns/volatility of simply buying and holding a double-beta bull fund over the period we studied above? The gut wrenching drawdown of the early 00’s? I shudder to think…

]]> By: aleco http://marketsci.wordpress.com/2008/09/22/test-of-condor%e2%80%99s-vix-based-trading-strategy/#comment-245 aleco Sat, 27 Sep 2008 19:11:52 +0000 http://marketsci.wordpress.com/?p=712#comment-245 I don't think it's fair to compare the SP500 to a(ny) strategy that uses a leveraged ETF. A buy and hold of the leveraged ETF would have similar returns, but without trading fees. By the way, how many trades did the system cause per year? In my local database (70 global ETFs, a total of 460 years of data) the returns 20 and 50 days after a spike in volatility [1] are rather high, and the returns are very/rather low when the volatility is very low. In both cases the difference compared to the average is less than 1%, meaning that trading frictions will eat the edge. You could slightly optimize the system by also using the RSI14, e.g. go long when vola is very high and RSI very low, go short when vola drops and RSI is high (you'd currently be long in large cap, technology, taiwan and africa btw). Still I'm not convinced that such strategies are an interesting option once trading fees are added. [1] volatility: standard deviation of open/close/high/low values for the last 20 days, as it has a high correlation to the VIX and will therefor allow you to build a kind-of VIX for any asset. I don’t think it’s fair to compare the SP500 to a(ny) strategy that uses a leveraged ETF. A buy and hold of the leveraged ETF would have similar returns, but without trading fees. By the way, how many trades did the system cause per year?

In my local database (70 global ETFs, a total of 460 years of data) the returns 20 and 50 days after a spike in volatility [1] are rather high, and the returns are very/rather low when the volatility is very low. In both cases the difference compared to the average is less than 1%, meaning that trading frictions will eat the edge.

You could slightly optimize the system by also using the RSI14, e.g. go long when vola is very high and RSI very low, go short when vola drops and RSI is high (you’d currently be long in large cap, technology, taiwan and africa btw).

Still I’m not convinced that such strategies are an interesting option once trading fees are added.

[1] volatility: standard deviation of open/close/high/low values for the last 20 days, as it has a high correlation to the VIX and will therefor allow you to build a kind-of VIX for any asset.

]]> By: Technical Analysis at iBankCoin.com » Blog Archive » Weekend Wisdom http://marketsci.wordpress.com/2008/09/22/test-of-condor%e2%80%99s-vix-based-trading-strategy/#comment-244 Technical Analysis at iBankCoin.com » Blog Archive » Weekend Wisdom Sat, 27 Sep 2008 15:15:35 +0000 http://marketsci.wordpress.com/?p=712#comment-244 [...] From Market Sci Blog: Test of Condor’s VIX Trading Strategy [...] [...] From Market Sci Blog: Test of Condor’s VIX Trading Strategy [...]

]]> By: marketsci http://marketsci.wordpress.com/2008/09/22/test-of-condor%e2%80%99s-vix-based-trading-strategy/#comment-219 marketsci Tue, 23 Sep 2008 22:55:07 +0000 http://marketsci.wordpress.com/?p=712#comment-219 RE to eber terandst...not sure what method you were using, but for broad indices like the S&P 500, this shouldn't be any issue. For example, r-squared between S&P 500 index and ProFunds double beta fund ULPIX for daily changes runs about 99.9%, for weekly changes, about 99.8%. For more narrowly focused funds (like individual sectors) I've found the r-square to be much lower and much less accurate. You're right that at very long horizons/hold times (say 1 year) the slow tracking drift would be any issue, but for very short-term strategies (like the one in this post), it shouldn't be an issue. Thanks for the comment! michael P.S. I would do a more detailed demonstration of the simulated funds concept, but then only you and I would read it =) Got to keep it reasonably ungeeky. But I will share the formula I use for broad based funds where the beta is consistent: Simulated Price Change at Day 1 = (((Index Close at Day 1 / Index Close at Day 0) - 1) * Beta) - (((1 + Expense Ratio %) ^ (1/252)) - 1) RE to eber terandst…not sure what method you were using, but for broad indices like the S&P 500, this shouldn’t be any issue. For example, r-squared between S&P 500 index and ProFunds double beta fund ULPIX for daily changes runs about 99.9%, for weekly changes, about 99.8%. For more narrowly focused funds (like individual sectors) I’ve found the r-square to be much lower and much less accurate.

You’re right that at very long horizons/hold times (say 1 year) the slow tracking drift would be any issue, but for very short-term strategies (like the one in this post), it shouldn’t be an issue.

Thanks for the comment!

michael

P.S. I would do a more detailed demonstration of the simulated funds concept, but then only you and I would read it =) Got to keep it reasonably ungeeky. But I will share the formula I use for broad based funds where the beta is consistent:

Simulated Price Change at Day 1 = (((Index Close at Day 1 / Index Close at Day 0) – 1) * Beta) – (((1 + Expense Ratio %) ^ (1/252)) – 1)

]]> By: eber terandst http://marketsci.wordpress.com/2008/09/22/test-of-condor%e2%80%99s-vix-based-trading-strategy/#comment-218 eber terandst Tue, 23 Sep 2008 16:25:16 +0000 http://marketsci.wordpress.com/?p=712#comment-218 I found your comment on simulating leveraged funds extremely intriguing. I tried something like that and found that the correlations drop very fast after only a few days. So, it might work as an acceptable proxy for a very high frequency trading system,say, in and out in a couple of days. Longer than that and the simulated fund will not reflect reality. Would you care to comment on the details of your simulated leveraged funds ? Thanks eb I found your comment on simulating leveraged funds extremely intriguing. I tried something like that and found that the correlations drop very fast after only a few days. So, it might work as an acceptable proxy for a very high frequency trading system,say, in and out in a couple of days. Longer than that and the simulated fund will not reflect reality.
Would you care to comment on the details of your simulated leveraged funds ?
Thanks
eb

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