Trading The Fear Index

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The importable AIQ EDS file based on Markos Katsanos’ article in the August 2022 issue of Stocks & Commodities magazine, “Trading The Fear Index” and the “CUM1.csv” file can be obtained on request via email to info@TradersEdgeSystems.com. Code for the author’s system is set up in the AIQ code file.

Synopsis: Here is a long-short strategy to capitalize on stock market volatility using volatility-based exchange-traded funds (ETFs or ETNs)… 

! VIX ETF SYSTEM
 ! This should be applied only to long VIX ETF.
 ! VIX ETF DAILY LONG-SHORT TRADING SYSTEM 
 ! COPYRIGHT MARKOS KATSANOS 2022
 ! To be applied on a daily chart of long VIX ETFs:
   ! VXX,VIXY,UVXY,VIXM,VXZ,SVOL  
 ! INPUTS:
 C is [close].
 H is [high].
 L is [low].
 VIXUPMAX is 50. ! VIX UP% MAX
 VBARS is 6.         ! Number of bars to calculate VIXUP,VIXDN & RC 
 STBARSL is 25.   ! Number of bars to calculate slow stochastic 
 STBARSS is 10.   ! Number of bars to calculate fast stochastic
 ! COMPARISON INDEX   
 VIXC is TickerUDF("VIX",C).   
 VIXH is TickerUDF("VIX",H).   
 VIXL is TickerUDF("VIX",L).                                                
 SPYC is TickerUDF("SPY",C). 
 SPYH is TickerUDF("SPY",H). 
 SPYL is TickerUDF("SPY",L).   
 ! STOCHASTIC
 STOCHVS is (VIXC-lowresult(VIXL,STBARSS))/(highresult(VIXH, STBARSS)-lowresult(VIXL, STBARSS)+0.0001)100. STVIXS is simpleavg(STOCHVS,3). STOCHSS is (SPYC-lowresult(SPYL,STBARSS))/(highresult(SPYH,STBARSS)-lowresult(SPYL,STBARSS)+0.0001)100.
 STSPYS is simpleavg(STOCHSS,3).
 STOCHVL is (VIXC-lowresult(VIXL,STBARSL))/(highresult(VIXH,STBARSL)-lowresult(VIXL,STBARSL)+0.0001)100. STVIXL is simpleavg(STOCHVL,3). STOCHSL is (SPYC-lowresult(SPYL,STBARSL))/(highresult(SPYH,STBARSL)-lowresult(SPYL,STBARSL)+0.0001)100.
 STSPYL is simpleavg(STOCHSL,3).
 !VIX
 VIXDN is (VIXC/valresult(highresult(VIXC,VBARS),1)-1)100.  VIXUP is (VIXH/valresult(lowresult(VIXL,VBARS),1)-1)100.
 ! CORRELATION TREND
 PeriodToTest is VBARS-1.
   !CUM1 is a custom ticker from DTU import of a CSV file**   !CUM1 file is required for this system to work
      ! PEARSON CORRELATION
 ValIndex is TickerUDF("VIX", [close]).
 ValTkr is TickerUDF("CUM1", [close]).
 SumXSquared is Sum(Power(ValIndex,2), PeriodToTest).
 SumX is Sum(ValIndex, PeriodToTest).
 SumYSquared is Sum(Power(ValTkr,2), PeriodToTest).
 SumY is Sum(ValTkr, PeriodToTest).
 SumXY is Sum(ValTkr*ValIndex, PeriodToTest).
 SP is SumXY - ( (SumX * SumY) / PeriodToTest ).
 SSx is SumXSquared - ( (SumX * SumX) / PeriodToTest ).
 SSy is SumYSquared - ( (SumY * SumY) / PeriodToTest ).
 RC is SP/SQRT(SSx*SSy).
 !LONG
 BR1 if HasDataFor(STBARSL+10)>STBARSL+3.
 BR2 if STVIXL>STSPYL .
 BR3 if STVIXS>STSPYS.
 BR4 if STVIXS>valresult(STVIXS,1).
 BR5 if VIXUP>VIXUPMAX.
 BR6 if RC>0.8.
 BR7 if RC>valresult(RC,1).
 BUY if BR1 and BR2 and BR3 and BR4 and BR5 and BR6 and BR7.
 SR1 is STSPYS>STVIXS.
 SR2 is STVIXS<valresult(STVIXS,1). 
 SELL if SR1 or SR2. 
 !SHORT
 SS1 if HasDataFor(STBARSS+10)>STBARSS+3.
 SS2 if VIXC<= lowresult(VIXC,3). SS3 if VIXUP15.
 SS6 if STSPYS>STVIXS.
 SS7 if STSPYS>valresult(STSPYS,1).
 SHORT if SS1 and SS2 and SS3 and SS4 and SS5 and SS6 and SS7.
 CR1 if VIXUP>VIXUPMAX.
 CR2 if STVIXS>valresult(STVIXS,1).
 CR3 if RC>0.8.
 COVER if CR1 and CR2 and CR3.
 TEST if 1=1.

Figure 6 shows the CUM1.csv file that must be created in Excel and then imported using the DTU utility to a new index ticker called “CUM1.” The file increments one unit, like an index, for each trading day starting on 10/1/2003 and continues to the current date. This file would have to be updated manually via the data manager function.

Sample Chart

FIGURE 6: AIQ SYSTEMS. This shows the portion of the CUM1.csv file that must be created in Excel.

Figure 7 shows a summary EDS backtest of the system using the VXX and VXZ from 6/21/2018 to 6/21/2022.

Sample Chart

FIGURE 7: AIQ SYSTEMS. This shows a summary EDS backtest of the system using the VXX and VXZ from 6/21/2018 to 6/21/2022.

—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems