Now rather than blindly buying SPY at each VIX level, thought I will combine with another study I am checking currently i.e., week of the day effect on SPY. (Note: If any readers are interested in pure VIX level based entries test then please let me know. I will do in one of the future posts).
Test:
- Divide VIX range into 4 levels : 0-15, 15-30, 30-45, 45-60. (Note: My levels are slightly different from ETF but that shouldn't make much difference).
- Buy @ market next day open and sell after 2 days. Note: Only one position at a time. Next position is opened after the current position is closed. I think this condition is more realistic.
- Finally tabulate the performance metrics categorized by VIX level and Week of the day.
- Test Duration - 1995 to 2012 Current. Caveats - Results are frictionless i.e., no slippage & no commission.
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| SPY ETF - Week of the day profile by VIX regime |
Some takeaways
- Poor performance of longs when VIX level is above 45.
- Low performance of longs when VIX level is below 15. But draw downs are also low. So may be risk parity approach to increase the returns.
- The sweet spot seems to be to go long on SPY only when VIX level is between 15-45.
- VIX futures less than or equal to 15, no VIX calls are purchased
- VIX futures above 15 and less than or equal to 30, 1% of portfolio in VIX calls
- VIX futures above 30 and less than or equal to 50, 0.50% of portfolio in VIX calls
- VIX futures above 50, no VIX calls are purchased
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