About Our Strategy
We don’t divulge specifically what is happening “under the hood” of our strategy.
As one would expect, we take into account a number of factors that many other traders also consider, like the state of the VIX futures term-structure and the volatility risk premium, but there are a number of other factors we also take into account that (to the best of our knowledge) are unique to Volatility Made Simple.
These other unique factors are the competitive advantage of our strategy over our competitors, and thus, we keep them close to the vest.
Our intention is to be 99.99% systematic, mechanical, non-discretionary traders. We never override the system, except in the most dire of circumstances.
I add that last bit about “dire circumstances” because should there be a catastrophic move in the market (think October, 1987, or September, 2001), we would definitely reassess our current position based on the specific characteristics of that specific market.
Models like ours are built with an instrument’s history in mind, and might not be suited for unique, extreme outlier events in the future. In those very special circumstances, we would apply extra analytical horsepower, and in some cases choose to override the strategy’s signal.
First, I would suggest reading the prospectus for the specific ETPs you intend to trade. What I write below isn’t meant to override those risks identified by the ETP provider.
Having said that, I view the biggest risk of the strategy to be a catastrophic move within a short time frame (October, 1987 being the quintessential example).
Because on the vast majority of days we have exposure to inverse VIX ETPs (ex. XIV and ZIV), that single day move would most likely come in the form of a spike up in volatility as a result of a crash in the equity markets.
Note that I’m not talking about normal market gyrations. I’m talking about catastrophic, historically-significant moves. The kind that your children will be able to quote from memory.
Historically, most crashes of a magnitude that would cause us serious harm have come with some forewarning. The crash tends to be preceded by a softening in the markets. We’ve designed the strategy so that, given enough forewarning, it will pare down exposure (or shift to long VIX ETPs), mitigating or even profiting from the crash.
But there’s no guarantee that the next catastrophic move won’t come without that forewarning. We trade very volatile products using a purely directional strategy without protective stops. We’ve done what we can to create a strategy that detects when the market is prone to breaking down, but the risk still exists.
Why don’t we employ stops? Because in all of the testing we’ve done (which recall, includes the 2007/08 market, one of the most destructive in the market’s history), stops have significantly reduced performance, both in the absolute and risk-adjusted sense.
The problem lies in the fact that the stronger the VIX spikes up, the more likely it is to revert back to “normal” levels. Employing stops has historically almost always taken the strategy out at precisely the wrong time. With VIX products, things definitely tend to be darkest just before the dawn.
There are other risks as well, such as specific indicators that we use becoming ineffective, or a fundamental change in how traders price risk, but these would likely play out over a longer period of time, giving us (and you) plenty of time to adjust.
The catastrophic crash risk I discuss above is I believe the much bigger concern, and reinforces the importance of relegating these instruments to an appropriate percentage of your total portfolio.
Most brokers that cater to the trading (as opposed to “investing”) community offer market-on-close orders.
But if MOC orders are not available, fear not. Our strategy has not been overly sensitive to when orders are executed. Similar results would have been achieved historically trading at the open, close, or some other point in between.
Click to read more about this question on our blog.
I’ve been trading VIX ETP strategies substantially similar to what we show here at Volatility Made Simple since early 2011 (and trading quantitative strategies in general since the late 1990’s).
I have made small improvements to my approach over that time though, and the backtest I show here at VMS represents my best, most up-to-date work, but it is only that: a backtest.
In my own personal portfolio, I trade a number of different instruments and strategies which I don’t talk about here on the site in an effort to keep our service streamlined and straightforward. That diversification is of course a good thing, but the downside is that my past results include a lot of things that would be irrelevant to readers.
I am fixing that. Since launching Volatility Made Simple and making our strategy available to subscribers, I’ve begun trading the strategy we show here in a separate, standalone account. I intend to post account statements to the site once I’ve built up enough history to be useful to readers.
Because of how infrequently the strategy trades (less than once per week) and the type of orders we use (market-on-close), actual historical results match up very closely to the backtested historical results shown.
Note that backtested results already assume that transaction costs and slippage total 0.1% of each trade (0.2% round-trip).
About This Site
Because of what I do during the day, I choose to pen this site anonymously. I understand that not being able to put a face to this site is off-putting to some readers, but my hope is that the strength of my workmanship on our blog and the performance of our strategy will speak for themselves. I appreciate your understanding.
Readers will note that the majority of my blog posts involve me sharing my quantitative research in order to expand upon (or occasionally debunk) someone else’s work.
I like the idea of lifting others’ work up rather than presenting ideas as my own, because I realize that very few ideas are truly unique. After over a decade of quantitative analysis, I have but a handful of my own.
What you the reader see when you visit our blog is (I hope) a neat, concise final result, but in actuality, this process of searching for ideas, putting them to the test, and presenting them here is a bear.
That’s an observation, not a complaint, because it’s this never-ending process of searching-testing-presenting that keeps my tools sharp. Without it, I am even more prone than most to becoming complacent in my trading. In short, maintaining this site is good for me.
Why offer subscriptions?
I would be lying if I said that at least part of the reason wasn’t a good ol’ fashioned selfish profit-motive, but it definitely goes beyond that.
I genuinely believe that we have a good product.
A lot of research has gone into our strategy. I’ve seen the strategies that most traders are using (some of which we test on our blog), and I think we’re doing something better.
The trading volume our subscribers generate is but a drop in the collective bucket, and I expect, will have essentially zero impact on the ETPs we trade.
Given all of the above, there really is no reason not to share the good things we’re doing here with others.
Simple. Cancel at any time, and we will refund the prorated amount remaining on your subscription within 48 hours. To cancel (or modify) your subscription, click here.
Sorry, but no, we do not offer trials or discounts.
However, you may cancel at any time and we will refund the prorated amount remaining on your subscription within 48 hours.