Professional trader and financial blogger Rob Hanna of Quantifiable Edges fame today recounted Bill Luby’s VIX:VXV ratio, which compares near to intermediate-term volatility structures.  This reminded me of a close cousin indicator, the “3:10 Historic Volatility Indicator,” which I also first read about on Rob’s site (link).  As its name suggests, the Offset compares volatility over the last several days to volatility over the last ten days.

To further study this indicator, I have run it through CSS Analytics’ forthcoming release of its 2011 DV_Indis for Excel plug-in (*) with interesting results.  As usual, these insights became most evident using the Varadi percent rank twist. This allows us to consider relative volatility in terms of zones without concerning ourselves with hard and fast (read non-adaptive) absolute ratio values.

Here is what I found using the SPY as the trading proxy on a frictionless basis over the last ten years:

 

  1. Historically, it has paid to hold short when short-term volatility is at relative lows (bottom third), signaling extremes in near-term bullishness.
  2. It pays to hold long when volatility is just below its middle zone (say between the short/ level-1 zone and the median line).
  3. There is a noisy zone best left alone with little edge either way when short-term volatility is moderately high (above but near the median).
  4. There is another zone of extreme short-term bearishness that is again attractive to fade with a contrarian long where short-term volatility is significantly higher than normal (here the top twenty percent of ranked observations).

Like many successful equities oscillator systems, you will note a bullish tilt to these zone observations. While the edge is slight, the frictionless equity curve also demonstrates relatively fair persistence through time, outpacing buy and hold on balance. What zone would you guess we are in for next Monday?

 

Related posts:

  1. Improve Your Trading: Heat Zones Classification System Using Statistics
  2. Super Low Volatility and Next Day Performance
  3. Moderators of Daily Follow-through MR: Implied Volatility vs Historical Volatility
  4. Long DV2 in different 30-day volatility regimes
  5. Relative Volatility & Comparative Mean Reversion Strategy Performance