Using VIX To Trade SPY And The S&P 500 (VIX Trading Strategies)

Last Updated on July 14, 2022

 

The VIX is a popular measure of the implied volatility of S&P 500 index options. Put shortly, the VIX is a mean reversion indicator: when the risk premium increases (VIX is rising in value) it might be wise to buy stocks and sell when VIX drops in value.

In this article, we present several VIX trading strategies.

VIX vs SPY

Let’s start with a chart that shows the VIX and SPY (SPY is the ETF that tracks the S&P 500):

VIX vs SPY
VIX vs SPY

The lowest pane shows VIX (the blue line in the pane in the middle is a “synthetic VIX” called WilliamsVixFix). How does VIX affect SPY?

As you can see, the VIX goes the complete opposite way (negative correlation) compared to the stock market and it’s possible (of course) to make a VIX trading strategy based on the indicator. They are rarely both up and 99% of teh time the pattern is one of diverging paths.

VIX is a well-known indicator and a lot of strategies can be found on the internet. However, many of them are quite complicated. Personally, I have also tested a few of them.

VIX can also be traded. For example, the ticker VXX is an ETF for the short to intermediate volatility. However, an ETF can never replicate VIX completely and VIX is also a spot indicator.

Here is one idea to trade the VIX: Go long SPY/ES when VIX breaks the upper bollinger band (BB). Exit after two up days in SPY/ES (I have a fetish for this exit). I’ll test this in several versions: one going for the extreme fills, and others going for a lot more fills. The test period is from 2005 until July 2012.

VIX trading strategy no. 1:

Strategy 1: I’m using a 10-day moving average for the BB. I like to use short time frames since they are more responsive. First, let’s try with a standard deviation of 3 for the upper band. When testing, there is no fills using 3 STD.

VIX trading strategy no. 2:

Strategy 2: Here are the results using a standard deviation of 2.5:

Avg #Trades #Wins Max.win Max.loss
1.44 25 21 5.22 -1.39
VIX strategy #1
VIX strategy #1

VIX trading strategy no. 3:

Here are the results using a standard deviation of 2:

Avg #Trades #Wins Max.win Max.loss
0.93 70 53 12.89 -9.56

 

VIX strategy #2
VIX strategy #2

VIX trading strategy no. 4:

Here are the results using a standard deviation of 1.75:

Avg #Trades #Wins Max.win Max.loss
0.56 82 58 4.46 -9.56

 

VIX strategy #3
VIX strategy #3

VIX trading strategy no. 5:

Here are the results using a standard deviation of 1.5:

 

Avg #Trades #Wins Max.win Max.loss
0.49 102 72 4.33 -13.43

 

VIX strategy #4
VIX strategy #4

VIX trading strategy no. 6:

Here are the results using a standard deviation of 1:

 

Avg #Trades #Wins Max.win Max.loss
0.42 135 94 4.2 -13.43

 

VIX strategy #5
VIX strategy #5

 

The basic principle here is to buy on weakness and sell on strength. I’ll leave it up to the reader to do some more research.

(The equity chart in this article shows returns using just 50% of the capital per trade, ie. the return is double allocating 100%. The reason is a bug in my software. )

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The VIX trading strategies presented in this article are simple, but still seem to work. However, as always, we recommend doing your own backtesting when testing an indicator.

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  • Just wanted to point out the interesting factor regarding riskmanagement. As I can see from the two-three first pics, the subprime crash in 2008 didn’t hit that hard on the strategy. But when you lower the level of standard deviation, you also rise the exposure a bit.

    It’s a bit hard to read presicely on the graphs, but it seems to me that the crash are smoothen out a little on the first pics.

    Anyway, thanks for posting and sharing these ideas, it’s very inspiring.

    • I’m going to have a look at your findings. The reason I post is that I want to get input….

  • Interesting stuff. VXX is not a good proxy for the vix in the long term because it suffers from major contango issues – often 10% per month!