WilliamsVixFix Trading Strategies – Does It Work?
WilliamsVixFix indicator was invented back in 2007 when the well-known trader and “indicator innovator” Larry Williams wrote an article in Active Trader about VIX and how you can create your synthetic VIX for any security you like. The aim of Williams was to create a “synthetic” VIX reading for other instruments than the S&P 500, the Nasdaq, and the Dow Jones 30.
In this article, we explain what the WilliamsVixFix indicator is, how you can use it, and whether is a good trading tool or not. We test one WilliamsVixFix trading strategy. The indicator works.
What is the VIX?
The VIX is derived from the implied volatility of stock index options on the Chicago Board Of Trade (CBOE).
It was introduced in 1993 and is intended to represent the “fear” or “complacency” of the market. Unfortunately, the VIX is only calculated for the S&P 500, Nasdaq, and the Dow Jones 30.
Related reading: Stock indicators list
Implied volatility is one of the major components in the price of an option: the higher the implied volatility, the more expensive the premium. Think of it as insurance. The more risk, the more you need to pay for insurance.
Opposite, when market participants see few clouds on the horizon, premiums go down as the perceived risk is smaller. The more volatility in the markets, the more you need to pay for insurance.
In the Black and Scholes option pricing model, implied volatility is the only factor that is “unknown” and subjective.
How does the VIX work?
The VIX oscillates up and down. A high reading means investor sentiment is one of increased fear, while low readings are associated with low-volatility conditions (and market tops). Thus, the VIX has a negative correlation to the S&P 500.
Is a high VIX good or bad?
A rule of thumb is that low volatility is often associated with market peaks, while high volatility is associated with market lows.
When the VIX is high, it shows fear is high and vice versa. A high VIX normally means the market has fallen, at least in the short term, and the risk premium for owning stocks increases.
This is normally a good time to buy for short-term traders. The stock market has turned out to be mean revertive, and we all know the long-term tailwind from earnings growth and monetary inflation.
However, the VIX measures the implied volatility for one month. A high reading today might be a good short-term opportunity to buy, but not necessarily a good entry for the long term.
As always, make sure you make quantified tests before you do any trades, but our experience indicates that volatility trading strategies work pretty well.
Below are the daily VIX readings for the S&P 500 since 2014:
Clearly, the VIX has been very high since COVID-19 struck. Because of this, we can’t say that one level is good and one level is bad. It all varies and you need to use moving indicators.
How is the Williams Vix Fix calculated?
Larry Williams wanted to make a synthetic VIX for other products and not just the main stock indices.
The formula for Williams VixFix is as follows:
Formula VIX Fix = (Highest (Close,22) – Low) / (Highest (Close,22)) * 100
What does this mean? In plain English it means the following and has the following definition:
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Why 22 days? 22 days represent the normal number of trading days in a month.
The formula is, as you can see, pretty easy. What it measures is the price volatility of the last 22 trading days and is, of course, a lagging indicator.
How does the WilliamsVixFix compare to the real VIX?
CM WilliamsVixFix is a synthetic VIX. How does it compare to the original VIX? Below is the chart of the S&P 500, Williams Vix Fix, and the VIX:
The blue line in the middle is the synthetic WilliamsVixFix. Although the readings on the right axis are a little different, we can clearly see the resemblance. The levels, swings, magnitude, and timing are pretty similar.
Because of the resemblance, Larry Williams reasoned that the synthetic VIX fix can be used in other markets. Here’s how it looks at the ETF TLT:
If you are interested in learning specific VIX strategies, please watch our VIX-video:
How to use the Williams Vix Fix in trading strategies
In the Active Trader article, Larry Williams didn’t reveal any specific trading strategies. On the contrary, he suggested the strategy can be used for further use and experimentation.
We tried these Williams VixFix trading strategies:
WilliamsVixFix on Bollinger Bands
We tried the following strategy on the S&P 500 (you can, of course, test on other ETFs/futures):
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The best result is when using a length of around 10 days and a standard deviation of 2. This gives 212 trades since 2000, an average of 0.5% per trade, and a profit factor of 2.05.
WilliamsVixFix using PercentRank
A while back we read an article about using PercentRank as a variable. By using a longer lookback period the following strategy seems to work reasonably well:
- Go long if the WilliamsVixFix closed high on the x-day PercentRank. We used 98% as the threshold and entry on the close.
- The exit is when today’s close is higher than yesterday’s close. Exit on the close.
The strategy seems to work for a lookback period of up to 50 days. Using 10 days, ie. that the S&P 500 must close higher than 98% of the observations in the lookback period, produces 366 trades, 0.44% per trade, and a profit factor of 1.78.
If we turn it upside down and go short if it closes in the lower 2% of the range, use a longer lookback period of 50 days, and exit when the close is below the 5-day moving average, the strategy produces 113 trades, 0.32% per trade, and the profit factor is 1.92.
If you want to have the code please click on this link that contains all the code for all our free trading strategies:
Conclusion: Williams Vix Fix – does it work?
The Williams VixFix is a synthetic VIX, but in reality, it’s just a measure of the price volatility over the last 22 days.
However, because implied volatility is mostly a result of short-term volatility, the indicator resembles the VIX. The indicator is mean revertive.
Thus, the Williams Vix Fix seems to work reasonably well on stock indices. Surprisingly, it works pretty well on the short side. We didn’t test on other asset classes.
FAQ:
– How does the VIX work, and what does it represent in the market?
The VIX is derived from the implied volatility of stock index options on the Chicago Board Of Trade (CBOE). It represents the “fear” or “complacency” of the market, with high readings indicating increased fear and low readings associated with low-volatility conditions.
– Is a high VIX considered good or bad for traders?
A high VIX is generally associated with increased fear and market lows, presenting short-term buying opportunities. Conversely, low volatility is often linked to market peaks. The VIX has a negative correlation to the S&P 500.
– How does the Williams Vix Fix compare to the real VIX in terms of resemblance and functionality?
The Williams Vix Fix, though synthetic, closely resembles the original VIX in terms of levels, swings, magnitude, and timing. Larry Williams suggested its use in other markets based on this resemblance.