As you know we've been using the VVIX as a sort of earning
warning signal for market pullbacks when it first crosses up above
the 110 VOMMA level and has been working well.
that said I wondered about the history and it doesn't really
seem like it was useful before 2020? Also what's interesting is
that before 2020 it rarely went above 110, in fact some years only
spent 1 day or 0 days above 110.
Here's a table: Assuming an average of 253 trading days in a
year: This year it's spent nearly 100 days so far above 110 or 39%
of the time. In 2020 it spent 171 days above 110 or 67% of the
time, basically most of time it was above 110. Prior to 2020
however it was above 110 on average only 6.6% of the time. Also
most of the signals where it went above 110 was after the market
had already had a strong correction, thus it was too late to use
really. On the other hand this year and even last it's been good at
giving early warning signals before the market has sold off, not
after it already did like in the past. I attached some images
of VVIX for this year, 2020, and 2017 and 2013 for example
I'm not sure why this is the case, maybe VVIX wasn't widely used
before 2020? It's interesting how the last 2 years the
majority of time it's above 110, maybe a lot more hedging going on
now than used to? if anyone has thoughts on this let me
know
I interpret the 110 vomma zone needs to be dynamically
calculated over time as IV changes since VVIX measures IV of VIX
options. I believe that level has increased over time as IV and use
of VIX options has increased.
They show that VVIX tends to be higher when values of VIX itself
are higher but not as much as one would think. It’s definitely
academic stuff and I’m sure there are HFs calculating real time
optimal zones.
VVIX and an interesting observation
Posted by matt on 2nd of Aug 2021 at 04:44 pm
As you know we've been using the VVIX as a sort of earning warning signal for market pullbacks when it first crosses up above the 110 VOMMA level and has been working well.
that said I wondered about the history and it doesn't really seem like it was useful before 2020? Also what's interesting is that before 2020 it rarely went above 110, in fact some years only spent 1 day or 0 days above 110.
Here's a table: Assuming an average of 253 trading days in a year: This year it's spent nearly 100 days so far above 110 or 39% of the time. In 2020 it spent 171 days above 110 or 67% of the time, basically most of time it was above 110. Prior to 2020 however it was above 110 on average only 6.6% of the time. Also most of the signals where it went above 110 was after the market had already had a strong correction, thus it was too late to use really. On the other hand this year and even last it's been good at giving early warning signals before the market has sold off, not after it already did like in the past. I attached some images of VVIX for this year, 2020, and 2017 and 2013 for example
I'm not sure why this is the case, maybe VVIX wasn't widely used before 2020? It's interesting how the last 2 years the majority of time it's above 110, maybe a lot more hedging going on now than used to? if anyone has thoughts on this let me know
I interpret the 110 vomma
Posted by mitchell on 2nd of Aug 2021 at 05:23 pm
I interpret the 110 vomma zone needs to be dynamically calculated over time as IV changes since VVIX measures IV of VIX options. I believe that level has increased over time as IV and use of VIX options has increased.
When I previously looked into this topic this was helpful: https://www.macroption.com/volatility-vix-vvix-1307/
They show that VVIX tends to be higher when values of VIX itself are higher but not as much as one would think. It’s definitely academic stuff and I’m sure there are HFs calculating real time optimal zones.
that's a good theory, while
Posted by matt on 2nd of Aug 2021 at 06:34 pm
that's a good theory, while the 110 area seems to be of significance at the moment, in the past it was probably a different number like 105 etc