VIX Buy/Sell Signals For Option Traders
Mar.10, 2008 in
Neural Nets, Options, Products
Ah, the almighty ^VIX, everyone’s favorite indicator and the one index that a lot of option traders watch with bated breath. What if I were to tell you that you can use Stock Neuromaster to generate BUY/SELL signals for the ^VIX? Would you be interested?
I’m sure that option traders and writers would be keenly interested if a^VIX neural net model generated a SELL signal for a new short position because it would mean volatility is expected to drop. If it generated a BUY signal for a long position, then the option trader would expect volatility to increase! Don’t believe me? Here’s the chart!
Another way to use this when trading options is to build a neural net model for a particular stock and then buy/sell call and put options against it!
March 10th, 2008 at 1:30 pm
The “Vix and more” blog has lots of information about trading the VIX. There’s no easy way to trade the VIX index itself, and the VIX future does not following it’s underlying very closely, quite differently from most futures and their underlyings. This is probably because it is a “well known fact” that the VIX itself is strongly mean reverting. So big moves in the underlying does not cause a big move in the future, unless the contract is close to expiring of course.
March 10th, 2008 at 1:39 pm
Marius, I think this would be useful in you were interested in knowing the direction of volatility. If volatility was predicted to drop you go short a straddle. On the other hand if the model indicated that volatility was to increase, you go buy a straddle.
March 10th, 2008 at 1:45 pm
What would you be buying? My point was that the VIX future probably haven’t followed the moves you observe on the VIX itself (or at least it has moved relatively speaking a lot less), so the “move” you are observing on the underlying is not the same move as the future would make. Here’s a link to people who have done studies on it:
http://quantifiableedges.blogspot.com/2008/02/do-reliable-oscillations-in-vix-make.html
Summary: “Now, to see the effect that trading futures would have on the system, I downloaded all the historical data from CBOE and ran the trades through using front month options. I performed rollovers those times when the future expired before the trade closed. Note that the entry and exit triggers were based on the action in the VIX – not in the futures. The purpose of the study was to see whether someone could trade futures/options based on the action in the VIX index. The results? Instead of returning 170%/yr over the last 3 years, the system now returned 5% total!! Factor in some commissions and slippage and my incredible system is now a money-loser.”
March 10th, 2008 at 2:25 pm
Marius, that is an interesting article. I didn’t realize that the Futures VIX trades different than the VIX index but that was a bad assumption on my part (egg on the face). I guess the trick is to get a hold of some VIX futures data (continuous contract) and model that and see what happens.
However, I don’t think in the grand scheme of things it matters in this example as I’m not too interested in the % moves, (e.g, the VIX Futures moved +5% today and the VIX Index moved +5.3%) but rather, did I get the direction of the volatility right (i.e. UP or DOWN)?
March 11th, 2008 at 7:07 am
hi tom and NN model traders
i thought i would throw in my 2 cents in on the topic of vix. From my understanding the vix generaly has a futures contracts make up ,If there are more buy futures contracts it’s on the plus side ,if there are more sell futures contracts it’s negative.
So you could probably predict a short term surges of the S&P 100 options, S&P 500 options, spyder options and few others,as far as individual stocks go sometimes, maybe.The maybe being if you have a stock that responds well to broad market moves you might get your 2 pts,but i wouldn’t expect to much. (maybe a 50/50 bet short term)
To whom it may concern:
if you are thinking of individual stock options thats a little tricky.You pertty much have to consider them as an entity all on to themselves.They don’t always do what you expect them to do, and when you expect them to do it,with a ticking bomb of time decay and an experation date added. (in a nut shell timing is everything)
Then maybe your aproach could be completely different.Since you do have your trusty NN model you could use it this way.
First you have to find the right candidates ,volitile stocks that are known to move 3 pionts daily.(optionable)
Second stocks that move 5+ points in three day intervals with or against the market.(optionable)
Third this is where the NN comes in, you screen every stock on the list the night before for the biggest point movers for 1-3 day period.
Fourth you only buy calls/puts with a highest delta over.80 prefered, that would probably make them in the money or very volitile at the money calls/puts.( Delta represents the option percentage move of the underlying> .80+ = 80%+ move per 1pt. of underlying).
Fifth paper trading first to get the feel for things, you take your screened high point movers and you watch them as if you were trading.So lets say you have screened a candidate that came in as a 6 point mover in 3 days.So
how much can i squeeze out of that 6 points is the question, 3+ points might be doable,
but remember wishfull thinking and hope can back fire on you .Take the money and run aditude is a suviver mentallity that could come in handy
aspecially when things stall out and when time decay comes into play then run away and you will live to fight another day.(i couldn’t help myself i had to make that rhyme) Also knowing when you redo your screening there will be more candidates to look at everyday. (again with the rhyming)
STOCK OPTIONS ARE NOT AN EASY PIE IN THE SKY GET RICH SCEAM, IT’S HARD WORK THAT CAN HURT YOU.
P.S.There will be some sleepers at the money or just beneeth the money call/put options that will have a low delta, and lets say your NN model screner just went crazy, a 5 point mover next day.if you trust your model this might be the time to load up on some cheap calls/puts, but be carefull,GREED AND WISHFULL THINKING HAS RUINED MANY A OPTIONS TRADER.But if you stay on the NN model technical side as a decipline you will prevail. (oh yeah> try to squeeze 2+ points out of the sleeper for the rest of us will you)
March 11th, 2008 at 8:00 am
I forgot probably the most important thing and that is money managment>
Well if the call/put possition moves against you cut your losses right away.
if it goes possitive than maybe take a profit on call/put possition at underlying”s 3% move in your direction by selling half your call/put possition and or if the NN model worrents such a safeguard.Then move your stop to break even and let the other half of your call/put possition go for a few more days if your tempted.(and i know you will be and i would be too) But remembering all the way, time decay and stagnation is a killer. GOOD TRADING TO EVERYONE
March 11th, 2008 at 8:52 am
and one more thing to add
if the underlying does a falling knife on you then you will not have a chance to get out of your call/put possition without selling at a scared money discount to someone on the floor who will just flip it for the 1/8 that gave him to bail out.This is where you’ll notice the “it’s own entity” aspect of options NOONE WANTS IT UNTIL IT’S GOING IN THAT DIRECTION OR TO FLIP IT it’s aspecially true with calls/puts that have below, say 300 daily interest
May 23rd, 2008 at 12:15 am
Like VIX Index - even the futures are kind of mean reverting - by that I mean futures trade at a spread over the underlying Index and every time the spread reach certain levels - if it is positive spread then the it falls and when the spread is negative it will rise. So my guess is that their must be relationship between the two - I have ran the spread data (VIX Index and generic Front month Futures on VIX).
view my blog: http://www.optionsview.blogspot.com to read more on the VIX and Options markets.
May 23rd, 2008 at 5:23 am
OV: Thanks for your thoughts!