VIX and probabilities

J

JC69

Quick background - been selling front month index 4 months and made 41% on margin, so I'm a committed seller, and new to this. I developed an "expected gain/loss" spreadsheet based on probabilities from OptionVue. Now that VIX is low, my spreadsheet shows significant expected loss from selling, so I've switched gears and bought $200k front month in RUT & NDX. I understand the general rule of selling high volatility and buy low vol. That leads to my question:

Does it make sense to blindly follow that general rule which dictates when to be a buyer/seller, or do you think my probabilities of selling are nearly the same regardless of VIX because "those in the know" are confident that stocks won't move much in the coming month, which is why VIX is properly low. Put another way, I'm not sure whether to believe OptionVue's percentages or the market's prediction of volatility in the coming month. Any input would be appreciated!
 
Quote from JC69:
----I'm a committed seller....
----I developed an "expected gain/loss" spreadsheet.....
----my spreadsheet shows significant expected loss from selling....
----Does it make sense to blindly follow that general rule....
----I'm not sure whether to believe.....
More...
Stop second-guessing your "method". Stay in the trade until your method says to get out. :cool:
 
Quote from JC69:

Quick background - been selling front month index 4 months and made 41% on margin, so I'm a committed seller, and new to this. I developed an "expected gain/loss" spreadsheet based on probabilities from OptionVue. Now that VIX is low, my spreadsheet shows significant expected loss from selling, so I've switched gears and bought $200k front month in RUT & NDX. I understand the general rule of selling high volatility and buy low vol. That leads to my question:

Does it make sense to blindly follow that general rule which dictates when to be a buyer/seller, or do you think my probabilities of selling are nearly the same regardless of VIX because "those in the know" are confident that stocks won't move much in the coming month, which is why VIX is properly low. Put another way, I'm not sure whether to believe OptionVue's percentages or the market's prediction of volatility in the coming month. Any input would be appreciated!
More...

One answer... Did you back test this?

I can understand your premise, but if I remember there were times when it seemed like a great time to sell vol only to watch it spike to absurd levels.

My point is that you are not wrong, just back test it to figure out what works and does not work.
 
Quote from JC69:

Quick background - been selling front month index 4 months and made 41% on margin, so I'm a committed seller, and new to this. I developed an "expected gain/loss" spreadsheet based on probabilities from OptionVue. Now that VIX is low, my spreadsheet shows significant expected loss from selling, so I've switched gears and bought $200k front month in RUT & NDX. I understand the general rule of selling high volatility and buy low vol. That leads to my question:

Does it make sense to blindly follow that general rule which dictates when to be a buyer/seller, or do you think my probabilities of selling are nearly the same regardless of VIX because "those in the know" are confident that stocks won't move much in the coming month, which is why VIX is properly low. Put another way, I'm not sure whether to believe OptionVue's percentages or the market's prediction of volatility in the coming month. Any input would be appreciated!
More...

The last 4 months have pretty much been a seller's dream so I wouldn't be too confident in my ability based on the results in this time period. In other words, as it has been suggested above, you should backtest your strategy.
 
Quote from christianhgross:

One answer... Did you back test this?

I can understand your premise, but if I remember there were times when it seemed like a great time to sell vol only to watch it spike to absurd levels.

My point is that you are not wrong, just back test it to figure out what works and does not work.
More...
Whilst backtesting is better than no backtesting, a successful backtest alone does not guarantee that the strategy shall work in the future. This sort of "thinking" ripped many a market-neutral or 130/30 quant-fund a new arsehole in 2007 when the "unexpected" occured.
 
Quote from Equalizer:

Whilst backtesting is better than no backtesting, a successful backtest alone does not guarantee that the strategy shall work in the future. This sort of "thinking" ripped many a market-neutral or 130/30 quant-fund a new arsehole in 2007 when the "unexpected" occured.
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I never said that a backtest ensures money. What I said was to backtest to see what works and does not work.

A back test will show you what your strategy does in the big picture sense. It is up to you to interpret those results. Statistics never predict they tell you what has happened, and you need to use those numbers with care.

I always use backtests to see the boundaries of my thinking. Otherwise you might as well just throw darts...
 
Good comments on backtesting, and I did order 5 years of data a couple months ago (haven't received it yet :(

Anyway, this may be a dumb question but I'll float it out there - I'm not sure how OptionVue calculates their percentages that I use for my IC decisions, but aren't they effectively backtested since they must be based on historical trends, and likely a more sophisticated backtesting than I could come up with? If so, could you argue that replaces the need for me to backtest?
 
Quote from JC69:



Anyway, this may be a dumb question but I'll float it out there - I'm not sure how OptionVue calculates their percentages that I use for my IC decisions, but aren't they effectively backtested since they must be based on historical trends, and likely a more sophisticated backtesting than I could come up with? If so, could you argue that replaces the need for me to backtest?
More...

JC, I will admit I'm not an expert in this area, but I imagine the calcs. from OptionVue are likely mathematicaly derived as opposed to having been derived from any backtesting or historical trends, and this could vary quite a bit from actual backtesting. i.e. a certain spike might be expected only once per 10 years, but maybe it has happened 3 years in row in real life or whatever.

In theory I think what you are saying makes sense in that it would "even out" over time, but that could be over 100s of years.
Of course, as others have pointed out, backtesting wouldn't "prove" anything either, but would be good for a sanity check and to see what might come up.

JJacksET4
 
I can't speak specifically about Optionvue, but usually the probabilities in these type of analysis software are calculated using the normal probability density function so I would say that this calculation definitely does NOT replace backtesting.
 
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