In 2012 we discussed methods of trading the CBOE Volatility Index (VIX) futures contract at CBOE Futures Exchange, LLC (CFE). In this article, we will review the previously discussed trading methods and how to apply them to the current market environment.
Liquidity is an important factor for trading. Several times during 2012 VIX futures volume reached record levels including a record high of 2,734,248 contracts in November, Which was a 233% increase from November 2011’s 822,017 contracts and which broke the prior trading volume record set in October by 12%. In November the Average Daily Volume for VIX futures was 130,202, an increase of 233% from November 2011. To date, the November VIX futures total volume is 86% higher than it was in 2011 and year-to-date trading volume is 21,344,285 contracts versus 11,455,871 in 2011.i
In past articles we discussed the use of four VIX futures trading strategies: 1) utilizing support and resistance to seek contrarian changes at range bound extremes; 2) crossing of moving averages; 3) utilizing the Aroon Oscillator; and 4) using the True Range to trade VIX futures. In this article the parameters have been set to the same level as they were set in previous articles.
We begin discussing the support and resistance methodology. We originally discussed this in the September 2012 article “VIX Trading Strategies”. The VIX futures contract historically tends to find major price support between 10 and 15 and it finds major price resistance around 40 (with the exception of the financial crisis). As you will notice in the monthly chart below VIX futures tend to rally after forming a floor at or near a price of 15. This most recently occurred in 2010 and 2011. During the last several months, the VIX contract has once again found the price of 15 to be major price support area. Could this be the foundation of a floor for a rally in 2013?
Chart 1: Monthly Nearest VIX Futures Chart with Support and Resistance
Copyright ¬©2012 Mark Shore. Contact the author for permission for republication at email@example.com Mark Shore has more than 20 years of experience in the futures markets and managed futures, publishes research, consults on alternative investments and conducts educational workshops. www.shorecapmgmt.com
Mark Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business in Chicago where he teaches a managed futures / global macro course and an Adjunct at the New York Institute of Finance.
Past performance is not necessarily indicative of future results. ¬†There is risk of loss when investing in futures and options. ¬†Always review a complete CTA disclosure document before investing in any Managed Futures program. ¬†Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. ¬†The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.