Skip to content


  1. Ohad Osterreicher
    August 28, 2022 @ 9:56 am

    Very cool stuff! A delight to read.

    Some questions and remarks:
    Do I understand correctly that SC TRUE LC FALSE strategy had days with simultaneously opposing trades? That is, you would buy calls on FALSE days and then switch to selling calls on TRUE days, while keeping your long call positions. Right?

    *Putting aside your point about the SR figure for naked call strategies* –
    Looking at the low SR of SC TRUE LC FALSE strategy would paint a false image because the variance of this strategy comes mostly from the right tail of the VIX distribution. When buying VIX calls, you are looking for these kinds of moves. Using something like a Sortino Ratio would be a better fit, no?

    Would you mind explaining what caused the outperformance of the FALSE LC strategy over the TRUE and daily entry LC strategies around 2008 and 2020? At first glace it seems odd, because the daily entry strategy should have been exposed to the tail event and so perform similarly to the FALSE LC strategy.
    I imagine that the TRUE and daily entry strategies suffered from buying vol when it was already richly priced, thus losing much of their gains, while the FALSE LC strategy bought vol cheaply and stopped after the tail event.

    Last remark: it’s pretty obvious to me why the SC strategies are extremely profitable – I would never trade them! Too risky! You need both lots of capital and guts to makes these work. No thank you (:


      August 30, 2022 @ 12:32 pm

      Glad to hear!

      Yes, that is correct. As the signal flips between true and false, existing positions remain open. Thus a trader will indeed have opposing trades.

      Agree, as long as the trader doesn’t have any objections to upside vol (usually a non-issue for retail, but institutional folks with PnL mandates may have their hands tied). Adding Sortino Ratio has been something I’ve considered from time to time. MAR Ratio and Calmar Ratio have also been considered.

      The VIX long call when “s1 = false” strategy performs well in a bearish environment. We can see a similar equity curve when reviewing the “short SPY when s1 = false” strat at In essence, s1 = false is a bearish indicator.

      It’s true the that the daily entry strat had the same exposure to tail events, but the amount of capital needed to successfully run the daily-entry strategy (eg: hedging all the time) for the duration of the backtest was almost an order of magnitude greater (see starting capital section). The starting capital is normalized to “the minimum amount needed to execute the strategy” a la hindsight bias. The tail events that do happen are drowned out by all the other capital in the account that is needed just to cross the finish line.


  2. Pratap Prabhu
    August 31, 2022 @ 9:10 pm

    Thanks for this study.
    I didn’t understand how we came to this conclusion?
    “Focusing on this asymmetry, opening VIX long calls only when s1 = false provided an incredible hedge against S&P 500 downside moves.”

    I tried to understand the data and didn’t arrive at the same. Can you elaborate?


      September 1, 2022 @ 12:10 am

      Hey Pratap!

      Sure — the 3rd chart in the “overall” section depicts the performance of opening a VIX long call when s1 = false (maroon line). These are substantial spikes to the upside in response to downward moves in SPY, far greater than the upward moves from opening VIX short puts when s1 = false.

      In my interpretation of the data, I’m weighing the magnitude of positive return from the VIX long call over the fact that the VIX short put hedge actually experienced a positive total return.

      If a trader is holding positions that have a more symmetric return profile (eg: not low-delta bullish short options), then the VIX short puts when s1 = false may be a better strategy.


      • Pratap Prabhu
        September 1, 2022 @ 12:19 am

        Got it thanks! The comment was in relation to the short put.

        That said, the long call still bleeds and results in overall negative return even accounting for the gains during SPY drawdowns. Is that correct?


Leave a Reply

Your email address will not be published. Required fields are marked *