Vix Trading Strategies

  • August 19, 2020

Do you have VIX trading strategies to use? As many traders are already aware, the CBOE Volatility Index (VIX) can be an extremely valuable tool when looking to gauge current market risk.

Because the VIX is derived from the S&P 500 Index option prices, that makes it a forward-looking indicator. But it can also be utilized on an intraday basis as well.

Many of us at Bullish Bears are fans of the TTM_Squeeze. The updated version is now known as the ST_SqueezePRO. The TTM_Squeeze comes bundled for free with Thinkorswim.

Vix Trading Strategies to Use 

  • The VIX is a great trading tool. As a result, VIX trading strategies can be incredibly beneficial to traders. Especially if you know how to read charts. Make sure you spend the time needed to learn how to trade the VIX as well as using it as a tool.

1. TTM Squeeze and VIX Trading Strategies

You can use the TTM Squeeze with VIX trading strategies. A detailed rundown of the SqueezePRO from Creedmoor can be found here. To be brief, the Squeeze indicators show us when the Bollinger Bands have entered the Keltner Channel on the chosen time frame. 

This tells us that there is consolidation in price and a reduction in volatility (commonly referred to as “compression”). The PRO version gives us three different levels of compression. While the standard TTM version gives us one.

These conditions have a high probability of being followed by a greater than expected move. Since VIX can only be traded via options, you might be thinking that a technical setup isn’t likely to play out as expected. 

However, it’s quite the contrary. VIX technical setups, especially squeezes, can serve as a powerful method of confirmation, filtration, and indication.

Especially when trading S&P-500 related products such as SPY (including options), SPX options, and E-mini S&P-500 Futures.

2. Trading Futures and VIX Trading Strategies

You can use VIX trading strategies with Futures trading also. This method can be utilized when trading other products such QQQ, E-mini NASDAQ 100 Futures, and individual large/mega cap stocks. 

But it’s IMPORTANT to note that the strongest correlation is tied to S&P products. Because the VIX is derived from the S&P.

Other products should be constantly reviewed to ensure that they are inverse from the VIX and correlated with the S&P product of your choosing.

Quick Pro-Tip: You can do this in ToS by adding the “Comparison” study on your VIX chart. Type in the desired symbol and make sure it’s moving AGAINST (AKA inverse) the VIX; just as the S&P products would. Today, we will only be covering a product tied to the S&P; SPY.

Check out  our example from Tuesday, August 11, 2020 below. This is using the VIX as a filter and indicator SPY 5min.

Vix trading strategies

In the above 5-minute chart, we see that SPY traded within it’s 5-minute Opening Range for the vast majority of the day. With abnormally long squeeze conditions lasting more than half of the session. In the last 2 hours of the day we saw a volume increase accompanied by a volatility increase. For the trend trader, it’s a very difficult day. But, only if you weren’t paying attention to VIX

How Do You Trade the VIX?

  • Using VIX trading strategies, what's the best way to trade it? Typically it's by buying ETFs and ETNs. These need to be tied to the VIX. There can be a lag with the VIX, however. Make sure you're paying attention to that. 

1. How to Use the 10 Minute VIX Chart

Let's look at how we can use a specific chart with our VIX trading strategies. In this 10 minute VIX chart, we can see that squeeze conditions weren’t met until the second half of the day.

VIX price was ever-so-slightly trending upwards, as seen in the stacked Cyan-21EMA and Purple-34EMA. At the marked new low point, it would be reasonable to anticipate SPY making a new high.

However we can see it did not (Figure 1). This is a clear indication that there is no notable concentrated buying pressure on the S&P. Sellers flew in shortly after, and this long awaited squeeze finally fired bearish

Vix Trading Strategies

This was a great learning opportunity for bulls and bears. For the bulls, standard squeeze trading rules would demand to take a long trade on SPY because of the 8, 21, and 34 EMAs being stacked in a bullish manner (Figure 1).

This is a scenario when the VIX chart acted as a filter for the setup. If you were bullish, VIX wasn't moving inverse with SPY; a clue that it’s not a good time to go long.

If you were already long SPY, it was a great chance to kill the trade on the failure to make a new high. In this same scenario, if you were bearish (and you should have been because of the VIX chart), the VIX acted as a solid confirmation indicator.

It's very clearly telling us that the bulls were running out of steam and that this SPY long setup had a notable probability of failure. The selloff offered two short entry opportunities (Figure 3 below) based on key price levels.

2. How Do You Trade Volatility?

VIX trading strategies can really help with volatility. Volatility is the bread and butter of traders. Especially for day traders.

Have you ever tried to trade without volatility? It can be like watching pain dry. Unless you're swing trading as a part time job. Then volatility isn't necessarily needed.  

But if you want volatility, using the VIX can help. Check out our example below on using it for a short.

Shorting

Short Entry 1 would be a highly aggressive entry based on the break below the 5-minute Opening Range. Short Entry 2 would be the more conservative, confirmation-oriented, entry based on the first swing low from the 5-minute Opening Range. These were both low risk entry opportunities allowing for tight stops for those with low risk tolerance.

3. Example From Thursday, August 6, 2020 Using the SPY 5min

Let's look at VIX trading strategies in action. In this 5m SPY chart we can see that prices attempted to push above the 5m Opening Range up to 8:30, then quickly came back down. 

It almost appeared that bears were taking over, and then buyers came in to push above the range again.

A clean long setup formed; offering an A+ quality entry opportunity near the Cyan-21EMA (a common line used to determine mean price levels), as well as being right on top of the 5m Opening Range. The 10min VIX chart below (Figure 5) confirms this setup.

5 min chart

4. Using the TTM Squeeze for Bearish Confirmation

The stock market doesn't only go up right? While it might seem like it does, especially right now, there are bearish days.

As a result, we need to use VIX trading strategies for both bullish and bearish trading. If you see a rounding bottom pattern but the everything else is bearish, what do you do?

Get confirmation of the bearish move on a bullish pattern. However, we can see in the example below, that there was no confusion on direction. We like those moves.

Here we can see that the VIX chart was CLEARLY bearish. There was no way to argue against or second guess the sentiment here. The bulls had obvious control of the S&P at this point. This made the long setup on SPY a very high probability trading opportunity with incredibly low risk due to the optimal entry point. This is the kind of trade setup that should make a squeeze trader’s mouth water

Closing Thoughts 

Hopefully after ready this, you have VIX trading strategies ready to go. Of course it’s always important to remember that nothing is 100% in the financial markets.

However, hindsight is 20/20. As noted earlier, you should always be comparing your chart against the VIX to ensure they are moving inverse of each other. 

A key rule that many follow is to be able to quickly identify the setup within seconds. If you need to stare at a chart as if you were deciphering code, there’s probably not a good setup.

At that point, it would be wise to walk away until you have a better setup that you can see clear as day. To all you squeeze traders out there: Stay Green.

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