I have decided to create a subscription for my volatility trading strategy.
You can find the subscription link here.
Below are the FAQs for the strategy.
Thank you for visiting. After gauging interest from my readership on my main site (quantstrattrader.wordpress.com), I created this as a subscription page for quantitative investment strategies, with the goal of having subscribers turn their cash into more cash, net of subscription fees (hopefully). The systems I develop come from a background of learning from experienced quantitative trading professionals, and senior researchers at large firms. The current system I initially published a prototype for several years back and watched it being tracked, before finally starting to deploy my own capital earlier this year, and making the most recent modifications even more recently.
And while past performance doesn’t guarantee future results and the past doesn’t repeat itself, it often rhymes, so let’s turn money into more money.
Some FAQs about the strategy:
What is the subscription price for this strategy?
Currently, after gauging interest from readers and doing research based on other sites, the tentative pricing is $50/month. As this strategy builds a track record, that may be subject to change in the future, and notifications will be made in such an event.
What is the description of the strategy?
The strategy is mainly a short volatility system that trades XIV, ZIV, and VXX. As far as volatility strategies go, it’s fairly conservative in that it uses several different checks in order to ensure a position.
What is the strategy’s edge?
In two words: risk management. Essentially, there are a few separate criteria to select an investment, and the system spends a not-insignificant time with no exposure when some of these criteria provide contradictory signals. Furthermore, the system uses disciplined methodologies in its construction in order to avoid unnecessary free parameters, and to keep the strategy as parsimonious as possible.
Do you trade your own capital with this strategy?
When was the in-sample training period for this system?
A site that no longer updates its blog (volatility made simple) once tracked a more rudimentary strategy that I wrote about several years ago. I was particularly pleased with the results of that vetting, and recently have received input to improve my system to a much greater degree, as well as gained the confidence to invest live capital into it.
How many trades per year does the system make?
In the backtest from April 20, 2008 through the end of 2016, the system made 187 transactions in XIV (both buy and sell), 160 in ZIV, and 52 in VXX. Meaning over the course of approximately 9 years, there was on average 43 transactions per year. In some cases, this may simply be switching from XIV to ZIV or vice versa. In other words, trades last approximately a week (some may be longer, some shorter).
When will signals be posted?
Signals will be posted sometime between 12 PM and market close (4 PM EST). In backtesting, they are tested as market on close orders, so individuals assume any risk/reward by executing earlier.
How often is this system in the market?
About 56%. However, over the course of backtesting (and live trading), only about 9% of months have zero return.
What are the distribution of winning, losing, and zero return months?
As of late October 2017, there have been about 65% winning months (with an average gain of 12.8%), 26% losing months (with an average loss of 4.9%), and 9% zero months.
What are some other statistics about the strategy?
Since 2011 (around the time that XIV officially came into inception as opposed to using synthetic data), the strategy has boasted an 82% annualized return, with a 24.8% maximum drawdown and an annualized standard deviation of 35%. This means a Sharpe ratio (return to standard deviation) higher than 2, and a Calmar ratio higher than 3. It also has an Ulcer Performance Index of 10.
What are the strategy’s worst drawdowns?
Since 2011 (again, around the time of XIV’s inception), the largest drawdown was 24.8%, starting on October 31, 2011, and making a new equity high on January 12, 2012. The longest drawdown started on August 21, 2014 and recovered on April 10, 2015, and lasted for 160 trading days.
Will the subscription price change in the future?
If the strategy continues to deliver strong returns, then there may be reason to increase the price so long as the returns bear it out.
Can a conservative risk signal be provided for those who might not be able to tolerate a 25% drawdown?
A variant of the strategy that targets about half of the annualized standard deviation of the strategy boasts a 40% annualized return for about 12% drawdown since 2011. Overall, this has slightly higher reward to risk statistics, but at the cost of cutting aggregate returns in half.
Can’t XIV have a termination event?
This refers to the idea of the XIV ETN terminating if it loses 80% of its value in a single day. To give an idea of the likelihood of this event, using synthetic data, the XIV ETN had a massive drawdown of 92% over the course of the 2008 financial crisis. For the history of that synthetic (pre-inception) and realized (post-inception) data, the absolute worst day was a down day of 26.8%. To note, the strategy was not in XIV during that day.
What was the strategy’s worst day?
On September 16, 2016, the strategy lost 16% in one day. This was at the tail end of a stretch of positive days that made about 40%.
What are the strategy’s risks?
The first risk is that given that this strategy is naturally biased towards short volatility, that it can have potential for some sharp drawdowns due to the nature of volatility spikes. The other risk is that given that this strategy sometimes spends its time in ZIV, that it will underperform XIV on some good days. This second risk is a consequence of additional layers of risk management in the strategy.
How complex is this strategy?
Not overly. It’s only slightly more complex than a basic momentum strategy when counting free parameters, and can be explained in a couple of minutes.
Does this strategy use any complex machine learning methodologies?
No. The data requirements for such algorithms and the noise in the financial world make it very risky to apply these methodologies, and research as of yet did not bear fruit to justify incorporating them.
Will instrument volume ever be a concern (particularly ZIV)?
According to one individual who worked on the creation of the original VXX ETN (and by extension, its inverse, XIV), new shares of ETNs can be created by the issuer (in ZIV’s case, Credit Suisse) on demand. In short, the concern of volume is more of a concern of the reputability of the person making the request. In other words, it depends on how well the strategy does.
Can the strategy be held liable/accountable/responsible for a subscriber’s loss/drawdown?
Let this serve as a disclaimer: by subscribing, you agree to waive any legal claim against the strategy, or its creator(s) in the event of drawdowns, losses, etc. The subscription is for viewing the output of a program, and this service does not actively manage a penny of subscribers’ actual assets. Subscribers can choose to ignore the strategy’s signals at a moment’s notice at their discretion. The program’s output should not be thought of as the investment advice coming from a CFP, CFA, RIA, etc.
Why should these signals be trusted?
Because my work on other topics has been on full, public display for several years. Unlike other websites, I have shown “bad backtests”, thus breaking the adage of “you’ll never see a bad backtest”. I have shown thoroughness in my research, and the same thoroughness has been applied towards this system as well. Until there is a longer track record such that the system can stand on its own, the trust in the system is the trust in the system’s creator.
Who is the intended audience for these signals?
The intended audience is individual, retail investors with a certain risk tolerance, and is priced accordingly.
Isn’t volatility investing very risky?
It’s risky from the perspective of the underlying instrument having the capacity to realize very large drawdowns (greater than 60%, and even greater than 90%). However, from a purely numerical standpoint, the company taking over so much of shopping, Amazon, since inception has had a 37.1% annualized rate of return, a standard deviation of 61.5%, a worst drawdown of 94%, and an Ulcer Performance Index of 0.9. By comparison, XIV, from 2008 (using synthetic data), has had a 35.5% annualized rate of return, a standard deviation of 57.7%, a worst drawdown of 92%, and an Ulcer Performance Index of 0.6. If Amazon is considered a top-notch asset, then from a quantitative comparison, a system looking to capitalize on volatility bets should be viewed from a similar perspective. To be sure, the strategy’s performance vastly outperforms that of buying and holding XIV (which nobody should do). However, the philosophy of volatility products being much riskier than household tech names just does not hold true unless the future wildly differs from the past.
Is there a possibility for collaborating with other strategy creators?
Feel free to contact me at my email email@example.com to discuss that possibility. I request a daily stream of returns before starting any discussion.
Because past all the artsy-craftsy window dressing and interesting choice of vocabulary, Patreon is simply a platform that processes payments and creates a centralized platform from which to post subscription-based content, as opposed to maintaining mailing lists and other technical headaches. Essentially, it’s simply a way to outsource the technical end of running a business, even if the window dressing is a bit unorthodox.