DOW-VIX Trading System

There are as many trading systems as there are grandmothers in this world. Everyone who has ever traded a single stock has used a system, more than likely it was news, or loudmouth blowhard driven. Nothing really concrete.

There are several systems I have been testing out, to see whether or not they should be used or put in Shady Oaks Retirement Village. This trading system that I am testing out goes off of VIX--the options volatility index. There is just about an index for everything, from Oil to the Dow and back again. When vix is low, volatility is low; prices in the market are making their slow march up.

It comes to a point when the VIX bottoms out, usually at some prior established support. In 2006 it was establishing itself around 10. 2007 tested 16 as a low support, as well as in the last 6 months. When VIX hits that low, VIX begins to rise and the DOW starts to fall, and in this case, it has fallen over 13%. Now we could short the Dow but as much as I've done shorts, I don't like the risk involved. Or rather we could short the DJX (1:100 ratio on the Dow), instead we could use its derivative--buy a put. Buying an ATM Put 60 - 90 days from expiration on the DJX would allow us to capture the fall from our sell signal without exposing ourselves to unneeded risk.

That is what systems are all about.