‘Fear index’ added to model capturing times of greatest stress

Camomille has successfully traded the VIX futures contract since its introduction over 10 years ago. Many fantastic opportunities existed in the term structure of the contract allowing medium dated term trades to be entered into for zero and exited for up to 2 points with low overall risk. Changes in the shape of the curve and high margining has made the previous return profile less attractive though.

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However using the concepts developed in our systematic model, mapping the sell-off, consolidation and recovery pattern of markets, we find that the movement in the VIX is not only as predictable after a sell-off as equity indices but historically even more profitable.


  • The VIX is a fear indicator. Although the negative correlation between the S&P and VIX is significant its beta is low. When the S&P sells off it is certain that the VIX will rise, however the magnitude of the rise is digital. A 5% fall in the S&P can create either a 30% move in the VIX on one occasion or a 60% move on another. On average the VIX moves 5 times as much.
  • The VIX is mean reverting. Once the S&P has sold off it can either stay low for a longer period of time or recover. The VIX however will quickly revert back to lower levels in both instances.
  • The term nature of the VIX contracts gives significantly positive carry by going short.
    The execution of the VIX trade typically happens earlier in our cycle so represents an efficient use of capital and spread of risk.

In our modelling we find that the win ratio for VIX trades is 75% versus 60% for the S&P, with the expected size of the recovery from the VIX some 3 times greater and potential profits per trade 8 times superior.

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