Using VVIX and VIX to Project the Range for SPX

[ondafringe]

A few days ago, I posted this in an older thread, but, apparently, that thread had exceeded its shelf life.

So let me ask again, here: Am I calculating the upcoming 30-day range for SPX correctly using VVIX and VIX?

I will use this past Thursday’s (1/11) closing numbers because I had already worked this out using those numbers.

VVIX: 75.54
VIX: 12.44
SPX: 4780.23

I believe both VVIX and VIX are annualized numbers, with VVIX being the “VIX” for VIX.

If you de-annualize VVIX to the upcoming 30-day period (75.54 / √12), you get 21.81 as a +/- percent range for VIX.

That would seem to indicate that, over the next 30 days, VIX is expected to range between 9.73 (12.44 * (1 – (21.81 / 100))) and 15.15 (12.44 * (1 + (21.81 / 100))).

Now, are those “projected” VIX range numbers also annualized? I’m not certain, but, if so, we would need to de-annualize the VIX range numbers, as well, which gives us 2.81 (9.73 / √12) and 4.37 (15.15 / √12) as a percent range for SPX.

So over the upcoming 30 days, SPX is expected to range between 4646 (4780 * (1 – (2.81 / 100))) and 4989 (4780 * (1 + (4.37 / 100))).

Anyone know whether that is the correct way to project the upcoming 30-day range for SPX using VVIX and VIX?

 

[stepandfetchit]

IMHOI: I think it is easy to get into the weeds too deep here. I would not reference VVIX here, but just use VIX (or I would prefer to compute the a 30-day value from ATM option IV's for removing the skew). Using the VIX directly should not be horrible. However, please note this is not a prediction that is expected to work precisely, but a statistical based prediction based on what is known at the time.

 

[ondafringe]

IMHOI: I think it is easy to get into the weeds too deep here. I would not reference VVIX here, but just use VIX (or I would prefer to compute the a 30-day value from ATM option IV's for removing the skew). Using the VIX directly should not be horrible. However, please note this is not a prediction that is expected to work precisely, but a statistical based prediction based on what is known at the time.

Understood; however, if you did decide to use VIX as your projection method, and since plugging the calculation formulas into a spreadsheet is easy, it seems using VVIX, as well, would be a good idea. Now, if using VIX alone gives you something pretty close to VVIX and VIX, then maybe it's not worth it. I haven't looked at that yet.

The main question I had about my calculations is whether the projected VIX range is also annualized and needs to be de-annualized?

Thanks for your response.

 

[Zelos]

Yup the VIX is annualized. Your calculations look correct as far as my understanding goes. To add:
VIX/16 = daily 1 SD expected moves
VIX/√52 = weekly 1 SD expected moves
VIX/√12 = monthly 1 SD expected moves

 

[ajacobson]

The third leg of the stool looks at SPX and its prime components. Essentially, it's a pair's trade of expected VIX and expected SPX. It doesn't bat a 1000, but it is a deal great of volume in the physical pit. It can be lucrative enough to devote an entire team and technology to it. Still floor traded so plan on visiting the floor on your next trip to Chicago.
Bet you'll see academic research published shortly. Nothing here should be considered investment advice.

 

[ondafringe]

Yup the VIX is annualized. Your calculations look correct as far as my understanding goes. To add:
VIX/16 = daily 1 SD expected moves
VIX/√52 = weekly 1 SD expected moves
VIX/√12 = monthly 1 SD expected moves

Okay, thanks for checking my math. However, I understand using √52 and √30 for weekly and monthly, respectively, but I don't understand using 16 for your one day range. I de-annualized for daily using √252 and came up with a range for this past Friday of 4,744.55 and 4819.47. Given Friday's high/low, using √252 looks to be the right way to go.

 

[ondafringe]

The third leg of the stool looks at SPX and its prime components. Essentially, it's a pair's trade of expected VIX and expected SPX. It doesn't bat a 1000, but it is a deal great of volume in the physical pit. It can be lucrative enough to devote an entire team and technology to it. Still floor traded so plan on visiting the floor on your next trip to Chicago.
Bet you'll see academic research published shortly. Nothing here should be considered investment advice.

I've seen "pairs trading" mentioned a number of times in a number of places, but have never really looked into what that's all about. But your comment is interesting, enough so that, out of curiosity, I'll look into it just to add to my knowledge base. As far as Chicago, I don't see that ever happening!

 

[Quanto]

I've seen "pairs trading" mentioned a number of times in a number of places, but have never really looked into what that's all about. But your comment is interesting, enough so that, out of curiosity, I'll look into it just to add to my knowledge base. As far as Chicago, I don't see that ever happening!

The pairs trading strategy monitors performance of two historically correlated securities.

Algorithmic pairs trading
Today, pairs trading is often conducted using algorithmic trading strategies on an execution management system. These strategies are typically built around models that define the spread based on historical data mining and analysis. The algorithm monitors for deviations in price, automatically buying and selling to capitalize on market inefficiencies. The advantage in terms of reaction time allows traders to take advantage of tighter spreads.

Market neutrality

• The pairs trade helps to hedge sector- and market-risk. For example, if the whole market crashes, and the two stocks plummet along with it, the trade should result in a gain on the short position and a negating loss on the long position, leaving the profit close to zero in spite of the large move.
• Pairs trade is a mean-reverting strategy, betting that the prices will eventually revert to their historical trends.
• Pairs trade is a substantially self-funding strategy, since the short sale proceeds may be used to create the long position.