Volatility Mean Reversion (VIX)

Entry Logic

• Long Entry (on SPY): The VIX reaches an extreme high (e.g., above 30) and starts to reverse.
• Short Entry (on SPY): The VIX reaches an extreme low (e.g., below 12) and starts to reverse.
• Confirmation: A reversal candle on the VIX chart.
• Timeframe: Daily.
• Location: Extreme reading on the VIX.
• Market Condition: High or low volatility.

Exit Logic

• Profit Target: The VIX returns to its mean (around 20).
• Scaling Out: No.
• Trailing Stop: No.
• Signal Failure: Exit if the VIX makes a new extreme.
• Opposite Signal: Not applicable.
• Time Expiration: Hold for several days or weeks.
• Momentum Loss: Exit if the VIX stalls.

Stop Loss Structure

• Hard Stop: A new extreme on the VIX.
• Soft Stop: If the VIX does not continue to revert.
• Max Dollar Loss: Varies.
• Max Percent Loss: 5%.
• Structural Stop: Not applicable.

Risk Management Framework

• Risk Per Trade: 2%.
• Daily Limit: Not applicable.
• Weekly Limit: 5%.
• Max Drawdown: 20%.
• R:R Requirement: 3:1.

Position Sizing Model

• Sizing Approach: Fixed fractional.
• Volatility Adjustment: The strategy is a direct play on volatility.
• Conviction Sizing: No.
• Scaling In: Can scale in as the VIX moves further into extreme territory.
• Scaling Out: No.

Trade Filtering

• Market Conditions: Only at extremes of volatility.
• Setups: Requires a clear spike or trough in the VIX.
• Instruments: SPY, VIX futures, or VIX options.
• Time Restrictions: None.
• Chop/News Avoidance: The setup is often caused by news.

Context Framework

• Trend Direction: Counter-trend to the prevailing sentiment (fear or complacency).
• VWAP Relationship: Not applicable.
• MA Relationship: Not applicable.
• Range Location: At an extreme of the VIX's historical range.
• Higher TF Alignment: Not applicable.

Trade Management Rules

• Breakeven: No.
• Scale Out: No.
• Add Size: Yes, cautiously.
• Fast vs Slow Moves: The entry is often on a fast move, but the exit can be slow.

Time Rules

• Optimal Window: Any.
• Times to Avoid: None.
• Session Notes: A longer-term, portfolio-level strategy.

Setup Classification

• A+ Setup: VIX spikes above 40 and reverses.
• A Setup: VIX spikes above 30 and reverses.
• B Setup: VIX drops below 12 and reverses.
• C Setup: VIX is trading in its normal range.

Market Selection Criteria

• Instruments: SPY, VIX futures, VIX options.
• Volume: High.
• Volatility: The strategy is about volatility.

Statistical Edge Metrics

• Win Rate: 70-80%.
• Avg Win: 3R.
• Avg Loss: 1R.
• Profit Factor: 3.5.
• Expectancy: +1.7R.

Failure Conditions

• Market Conditions: A sustained period of high or low volatility that redefines the normal range.
• Specific Scenarios: A major financial crisis (like 2008) or a period of unusual calm (like 2017).

Psychological Rules

• Discipline: Must be willing to buy when there is extreme fear in the market and sell when there is extreme complacency.

Advanced Components

• Regime Detection: The VIX itself is a regime detection tool.
• Filters: Use the VIX term structure (the relationship between front-month and back-month futures) for additional information.
• Correlation: The strategy is based on the negative correlation between the VIX and the SPY.
• MTF Alignment: Not applicable.

Location

• Strongest: At the emotional extremes of the market cycle.
• Weakest: In a stable, mid-range volatility environment.