We can not only use the existing values of volatility indices, futures, and various types of moving averages for trading volatility. A quite popular direction is predicting volatility using various models. Most often, various GARCH models are used for this, but in this strategy, a simpler method is applied.
In this strategy, the volatility of volatility is used to determine the state of the market. Typically, when the stock market falls, the VIX sharply increases. And the rate of its change is much greater than in a calm state..
This strategy was published in the Evolution Capital workpaper. It analyzes both the shape of the VIX futures curve at the moment and the dynamics of the F1 and F2 futures spread (yield from rolling).
This is also a trending strategy. The signal for opening a position is a combination of two moving averages of the same period on the VIX.
Another trendy strategy in VIX-related instruments. Here, the presence of a trend in Constant Maturity futures on VIX is analyzed. If the faster moving average is below the slower one, implied volatility is decreasing. In such a situation, we short VXX. Otherwise, we stay out of the market.
In this strategy, we again short VXX. To assess the appropriateness of the short, use Bollinger Bands. They represent the distance in terms of standard deviations from the moving average. It is assumed that the behavior of the instrument within the upper and lower Bollinger Bands is a random deviation from the average. If the price value moves away from the average by a large number of sigmas (standard deviations), an anomaly is observed in the market for that instrument.
Another technical trend-following strategy with volatility ETP.. We use a short trend in VXX, determined by the crossing of simple moving averages.
This momentum strategy is also taken from an article by Double Digits Number. The idea is quite simple – go long on the best-performing volatility ETF from a selection. Choose the ETF with the maximum positive return over 4 months.
Apart from anomalies related to the rolling of futures or risk premium, instruments associated with volatility can be traded using technical strategies. The simplest of these is the use of simple moving averages.
This version of the VRP strategy was proposed by Trading the Odds, which has now ceased to exist.
The general logic of VRP strategies – to estimate the size of the IV premium over historical volatility – is preserved here. Then, depending on the dynamics of the premium (whether it is overstated relative to the average or not), a decision is made about entering positions. However, there are some specifics.