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Which Implied Volatility Ratio Is Best?

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This post will be about comparing a volatility signal using three different variations of implied volatility indices to predict when to enter a short volatility position. In volatility trading, there are three separate implied volatility indices that have a somewhat long history for trading–the VIX (everyone knows this one), the VXV (more recently changed to be called the VIX3M), which is like the VIX, except for a three-month period), and the VXMT, which is the implied six-month volatility period. This relationship gives investigation into three separate implied volatility ratios: VIX/VIX3M (aka VXV), VIX/VXMT, and VIX3M/VXMT, as predictors for entering a short (or long) volatility position. So, let’s get the data. require(downloader) require(quantmod) require(PerformanceAnalytics) require(TTR) require(data.table) download(“http://www.cboe.com/publish/scheduledtask/mktdata/datahouse/vix3mdailyprices.csv”, destfile=”vxvData.csv”) download(“http://www.cboe.com/publish/ScheduledTask/MktData/datahouse/vxmtdailyprices.csv”, destfile=”vxmtData.csv”) VIX <- fread(“http://www.cboe.com/publish/scheduledtask/mktdata/datahouse/vixcurrent.csv”, skip = 1) VIXdates <- VIX$Date VIX$Date <- NULL; VIX <- xts(VIX, order.by=as.Date(VIXdates, format = ‘%m/%d/%Y’)) vxv <-…
Original Post: Which Implied Volatility Ratio Is Best?