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Short VIX: What Signals Work?

Market Measures

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A technical analysis tool used by some stock and Futures traders is the Moving Average (MA). Traders use the event of different Moving Averages crossing each other in order to generate buy and sell signals. Whether or not this is a successful strategy for the stocks and Futures is debatable. What we are interested in within the scope of this study is if this can be successfully applied to the VIX which, since it is a measure of Implied Volatility (IV) we know will revert to the average. That is why we say it is Mean Reverting. Could we use a technical tool like a Moving Average crossover to signal us when to sell the VIX?

Our study was conducted in the VIX using data from 2006 to the present. We sold the 50/10 Delta Vertical Call Spreads when the 13-day Moving Average crossed above 21-day MA, when the 20-day MA crossed above 50-day MA, when the 50-day MA crossed above 200-day MA, and when the VIX was above 20. As an example, when the 20-day Moving Average crossed over the 50-day Moving Average, we sold a VIX call spread (short 50 delta + long 10 delta). We managed all trades at 50% of max profit (if possible).

On an average P/L basis, none of the strategies using “technical analysis” outperformed selling VIX call spreads in all environments let alone selling when the VIX was over 20. Technical analysis may be used by some when buying or selling outright stocks, but it doesn’t seem to help us at all as premium sellers.

For more information on the VIX see:

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study testing using moving average crossovers as a signal for when to short the VIX.

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