Fixing the VIX: An Indicator to Beat Fear
Journal of Technical Analysis, Forthcoming
9 Pages Posted: 17 Mar 2015 Last revised: 19 Mar 2015
Date Written: March 13, 2015
Volatility is widely considered to be a category of technical indicators with a simple interpretation - no matter how it is measured volatility is widely believed to rise in a market downturn. This approach is applied to indicators such as the Average True Range (ATR), Bollinger Bands® BandWidth or the most widely followed volatility indicator, VIX, which is formally known as the CBOE Volatility Index®.
VIX is widely known as the “Fear Index” because it often increases when the stock market drops and the fear of further price declines increases. While this concept sounds useful, there are significant limitations to executing trading strategies based on VIX and these limitations actually make VIX virtually useless for the average investor.
Although it is not widely followed, there is a simple volatility indicator available in the public domain that can be used to implement trading strategies based on the concept of VIX. This indicator, the VIX Fix developed by Larry Williams, overcomes all of the limitations of VIX. This paper will explain that indicator and introduce a quantitative trading strategy to profit from rising fear.
In the rest of this paper, I will briefly review what VIX is, highlight some of the limitations of VIX, describe an alternative to VIX and then provide test results demonstrating how well the VIX Fix works. The main focus of the paper is on the test results.
Keywords: Stocks, Options, Trading, Market, Volatility, Equities, Quantitative, Efficient Markets, Market Technicians Association, 2015 Charles H. Dow Award
JEL Classification: C00, C10, C50, G00, G11
Suggested Citation: Suggested Citation