Volatility Barometer - % of days in each "decile" range

Aug 10, 2020

The VB Threshold strategy has moved into SVXY for the first time in several months. That means we're now in the 20-40% range of the Volatility Barometer. 

Remember, the VB Threshold strategy directly follows the VTS Volatility Barometer values and holds positions based on what 20% "quintile" range it's currently in:

VTS VB Threshold Strategy:


Since the Volatility Barometer is now in the 30's, that means we've moved into the 20-40% range and will hold SVXY.

* Note, since inception we've used the mid-term inverse volatility ETP called ZIV for this section, but the ZIV was recently delisted so we've replaced it with holding SVXY. We have no control over what banks issue various ETPs so we just adapt with the current environment. SVXY and ZIV are both "short volatility" positions so the strategy remains materially the same using SVXY instead.

So today is a good time to just show how much time the Volatility Barometer actually spends in each of the ranges. Let's divide it down even further into "deciles" of 10% each.

Percent of trading days the VTS Volatility Barometer has spent in each 10% decile since January 1st, 2011:


I've highlighted the current range in green and you can see long term, it's fairly common to be in this current 30-40% range. 19.1% of trading days so about one fifth of the time. And since the VB Threshold strategy will hold SVXY within the 20-40% range we can combine two of them and see the full 20% width (19.1% + 22.4%)

The Volatility Barometer has spent 41.5% of trading days within the 20-40% range since inception. This is essentially the sweet spot of the strategy where a good percentage of the gains are coming from. 

As you'd expect from a strategy that divides the market into volatility ranges, it follows a descending pattern and the longer this data set gets extended in the future the smoother that pattern will be. We can expect more than half of trading days to be in the middle range, and then it falls off on either side of that.

That's essentially the heart of Volatility Trading Strategies. Understanding the volatility dispersion patterns of the broad market, and then knowing which asset classes perform best within those ranges.

Right now we're in the 30-40% range so obviously we will benefit if the market remains calm and we can establish a trend here. I know in the back of all of our minds we keep thinking the market is going to crash (it sure feels like it could) but I am 100% data dependent and quant based, so I just follow the rules of the strategy as if I'm a robot, and long term the results are what I want :)

Showing all trading days when the VTS Volatility Barometer was in the 30-40% range:


There's been a few sections where it didn't have any stable occurrences in the 30-40% range. The European debt crisis in 2011. The 2015 China hard landing scare. February 2018 Volpocalyse. The Q4 2018 market crash. And now, everything after February of this year before this whole Covid mess started.

Let's hope we can start to see regular occurrences below 40% again and ride some more boring trends...


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