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Another Another Volatility Trading Strategy

Hi people,

Simple volatility trading strategy employing the following rules
1. volatility risk premium (VRP) = implied volatility (VIX) - historical volatility
2. Forecast next day volatility using GARCH
3. volatility up (volUp) = GARCH (t+1) - VIX(t)
4. VRP < 0 and volUp > 0 -> buy VXX
5. VRP >0 and volUp buy XIV (harvest the velocity risk premium)

2015 and 2016 period, the return is relatively flat.
Any comment is welcome

4 responses

Omega is zero all the time is that as planned?

Hi Peter,

Yes, you can say that it's planned.
The omega is a parameter for GARCH model estimated using the MLE

If the optimization says it's zero, then it should be zero

Hey, Is there any way through which I can reduce volatility of the generated returns?

@Hemant

Below is tear-sheet of the same strategy using less volatile instruments SPY and IEF.