New Volatility Crossover System

01/01/2016 8:00 am EST


Lawrence McMillan

Founder & President, McMillan Analysis Corporation

Options expert Lawrence McMillan, of McMillan Analysis Corporation, discusses a new VIX crossover trading system he identified upon inspection of the number of times the CBOE Volatility Index closed above all three other Volatility Indices going back to November 2011.

Recently, the CBOE’s Volatility Index (VXST) closed above all three of the other CBOE Volatility Indices. At the time, it struck me as being a rather rare occurrence and it seemed there might be some considerations as to forthcoming market movement. Consequently, a rather extensive study was performed, and indeed a trading system did emerge, as this article will reveal.

Previously we had identified a VIX Crossover trading system and so it was logical to try to incorporate some of the facts of that system into this new system. Even so, there were several variations of the system that needed to be analyzed.  We can’t just buy the market every time VXST closes above the other three Volatility Indices, for—upon inspection—the condition is not all that rare: VXST has closed above all three other Volatility Indices on 161 of the last 1253 days or about 13% of the time. They tend to come in bunches, however, occurring when there is panic in the option market, when there is heavy demand for near-term options.  Figure 1 shows all four indices going back to November 2011, which is when the VXST Index was created.

Click to Enlarge

VXST is the dark blue line.  You can see that it pokes up above the other relatively infrequently, only about 15 times since the beginning of 2012.  However, it can stay above all the others for several days at a time when it does rise above them. 

You will also notice the aqua line that starts in December, 2013. That is when the VXMT—the longest-term of the CBOE Volatility Indices—was created. So, prior to that on the chart, VXST only had to rise above the other two indices in order to be the highest.  Since the creation of VXMT, it had to exceed three others...

By Lawrence McMillan, Founder and President, McMillan Analysis Corporation

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