Wednesday, July 17, 2013

Current state of my trading strategies on July 2013

At the moment I have two working strategies, first one trades VIX futures, the other trades SPX call options.

My working trading strategies

1. VIX futures strategy

I've started to trade my VIX strategy 16 April, so now I have 3 month of equity, that's at least something to look at. This equity is built from the trading algorithm logs, it takes into account all trading costs and doesn't reflect reinvestment effect.
Real life trading results April-July 2013

What this strategy does? When the market is calm, it goes short on VIX futures and makes money from closest contract contango, and when time comes for volatility to grow, the strategy tries to minimize losses. Sometimes it even goes long, but this is rare. As you can see, last volatility growth-decline cycle resulted in profit.

Backtesting equity

2. SPX call options

This is a fresh strategy still being under development, but I've already started to trade it on my account. I look at it as a supplementary strategy, because it is partially correlated with VIX futures strategy, which mostly makes money on overpriced put SPX options (the main source of implied volatility), and second strategy makes money on under-priced far-out-of-money call SPX options. Sometimes it happens together, but not always.

Backtesting equity, forward only

How does it work? I have option pricing model, and when it shows that some call SPX options are too cheap, it buys it and holds until it finds out that there is a better choice. This strategy doesn't require margin (SPX options are European style) and takes no more than 10% of account money for option position.

Further development plans

I'm not completely satisfied with VIX strategy, because shorting VIX futures leaves risks of sudden and painful volatility spike. I limit position size with maximum of 1.75, so 25% VIX future spike (happened once in history) result in 50% losses. I have to mention here that maximum acceptable drawdown for me is 100% of account, because I only keep on trading account the money I can afford to lose. Buy still having risk of losing half of trading money in one day is not very good. I would prefer to buy put options on VIX instead of shorting VIX futures directly, but I haven't found yet a good strategy to manage such a position. These options are too cheap (multiplier 100), bid-ask spreads are too wide, so transaction costs for active position roll will be unacceptable, and "hold until expiration" strategy is too restrictive. Anyway, I'm working on it.

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