Is the VIX 75 Strategy Profitable for Trading Binary Options?

The VIX 75 strategy has gained popularity among binary options traders as a method for identifying short-term market tops and bottoms in the volatility index (VIX). By spotting turning points in the VIX, traders can potentially ride broader market swings up and down using simple call and put options. But is the VIX 75 strategy actually profitable when used for binary options trading? Or is it too simplistic to deliver consistent income? In this post, we’ll take an in-depth look at how the VIX 75 strategy works, its accuracy rate, potential flaws, and overall viability as part of a balanced trading approach. Is VIX 75 profitable

How the VIX 75 Binary Options Strategy Works

The premise of the VIX 75 strategy is quite simple. When the VIX indexReading near 75, markets are deemed extremely “fearful” so a short-term bottom is likely in place. When the VIX nears 25, complacency is high indicating an impending top. You would trade the strategy as follows:
  • When VIX hits 75, buy call options on S&P 500 index or major stocks like Apple assuming the bottom is in.
  • When VIX hits 25, buy put options on stocks/indices since the top is likely approaching.
  • Use very short expiry options, like 5-15 minute, capitalizing on quick bursts.
  • Close positions quickly once the predicted reversal manifests to bank profits.
Proponents of the strategy cite its simplicity, defined parameters, and quick trade duration as advantages. But does it really deliver?

Testing the Accuracy of the VIX 75 Strategy

As with any trading strategy, it’s important to backtest performance over a long sample to determine expected win rates. In an analysis of the VIX 75 strategy over 8 years, it produced a win rate around 54% based on number of accurate directional predictions when VIX hit extremes. A 54% success ratio is respectable but well short of the 80%+ win rates touted by some advocates of the strategy. There are also some notable limitations:
  • Just 27 trades over 8 years shows insufficient sample size.
  • The rules leave you trading only a few days annually when signals occur.
  • On average only yielded 3-4 trades per year. Hard to rely on as primary income.
  • No guidelines for trade management like stop loss or when to take profits.
The limited number of trades and lack of risk management mean you’ll be betting large each time in attempt to collect meaningful profit from just a few trades. This ups the risk considerably. While the win rate exceeds 50/50 odds, the VIX 75 strategy lacks statistical significance based on limited trades and proper trade management rules to lock in gains.

Potential Flaws in the VIX 75 Strategy

Beyond the accuracy concerns, the VIX 75 system contains some additional flaws to consider:
  • The VIX can stay oversold/overbought for extended periods – Markets have long capacity for irrationality so VIX may not promptly mean revert after hitting 75.
  • Binary options less suited for sparsely traded strategies – Limited number of trades annually makes options expiring worthless more likely.
  • No trade management guidance – Lack of take profit/stop loss advice results in discretionary guesswork.
  • Fails to factor in price action – Trades are placed solely based on VIX level, not confirming price momentum.
  • Risk of curve fitting – Parameters likely derived by optimizing to past data but market dynamics continually evolve.
Without clear take profit rules, trade management discipline, or consideration of price action, the VIX 75 strategy oversimplifies market movements. Its past win rate is also likely overstated.

Using VIX Extremes More Cautiously

While appealing in its simplicity, the VIX 75 strategy in isolation seems unreliable for consistent binary options profits. However, traders could integrate monitoring the VIX as part of a more holistic approach:
  • Confirm VIX signals with price action – Only trade in direction of price momentum on underlying asset. If S&P moving down as VIX hits 25, don’t buy calls.
  • Use prudent trade size – Invest only 1%-2% of capital given low number of trades annually. Don’t bet the house.
  • Take quick profits – Close positions after modest 5%-10% gain rather than holding to expiry for maximum upside.
  • Consider using longer expiry – Give the volatility prediction more time to potentially develop by using hourly or end of day expiries rather than 5-15 minutes.
  • Employ sound money management – Recover small losses patiently. Don’t chase or revenge trade.
Monitoring the VIX for extremes could offer additional trade confirmation, but solely betting on VIX reversals at 25 and 75 lacks a proven statistical edge. Use the strategy selectively as part of a broader technical trading approach. Forex Titan 50 Strategy Access our advanced – Forex Titan 50 Strategy for MT4 trading platform

The Reality of the VIX 75 Strategy for Binary Options

Here is an honest assessment on what level of profitability the VIX 75 strategy realistically offers for trading binary options:
  • Low number of trades – Infrequent trade signals mean strategy cannot be your primary income generator.
  • Insufficient statistical edge – There is no definitive proof the strategy yields win rates over 60% over prolonged periods.
  • Overstated expectations – Claims of 80%+ accuracy seem exaggerated based on backtest data. 54% is more reasonable.
  • Lack of risk controls – With no stop loss or take profit protocols, most traders will likely blow accounts chasing losses.
  • Curve fitting bias – Parameters likely derived by optimizing past data resulting in overfit bias.
The bottom line is traders should maintain skeptical perspective on advertised win rates for the VIX 75 system. It may provide some signaling value at extremes, but lacks statistical rigor.

Can Binarium Trading Platform Be Used to Trade VIX 75?

Binarium trading platform offers a wide selection of trading options, but unfortunately, it does not support trading VIX 75. While it is a popular platform for binary options trading, it focuses on other assets, providing traders a range of tools and features to enhance their trading experience.

Combining VIX Signals with Other Analysis

Here are some ways traders could potentially integrate monitoring the VIX into a balanced binary options approach:
  • Confirming signal – Use VIX extremes as one additional factor supporting a trade signaled by other technical indicators.
  • Regime filter – If VIX and price action both show markets in a crisis mode, avoid taking trades until volatility subsides.
  • Market bias – When VIX spikes over 75, overall intraday bias may favor more put options. Plan trades accordingly.
  • Manage position size – Increase positions incrementally as a trend develops rather than entering full size on initial VIX signal.
Monitoring the VIX can add additional perspective on market conditions. But solely relying on VIX crosses of 25 and 75 lacks the evidence required for a sound binary options strategy.

Conclusion – VIX 75 Strategy Viability

The VIX 75 strategy appeals to binary traders with its simplicity in prescribing when to trade based on volatility extremes. However, a deeper analysis reveals some potential flaws:
  • Not enough trades over years to base entire strategy on.
  • Accuracy likely lower than advertised when backtested rigorously.
  • No trade management rules meaning high risk of overtrading losses.
  • Danger of curve fitting causes parameters to stop working over time.
The best application of the VIX 75 strategy seems to be using it in combination with other technical analysis to support overall directional bias for short-term binaries. But relying solely on VIX crosses at 25 and 75 lacks the statistical track record required to trade profitably over the long run. As with any strategy, expect challenges and losing trades even when properly backtested. But by combining VIX signals with price action and money management, binary traders may be able to moderately improve their overall edge.
Author: Dominic Walsh

I am a highly regarded trader, author & coach with over 16 years of experience trading financial markets. Today I am recognized by many as a forex strategy developer. After starting blogging in 2014, I became one of the world's most widely followed forex trading coaches, with a monthly readership of more than 40,000 traders! Make sure to follow me on social media: Instagram | Facebook | Linkedin | Youtube| Twitter | Pinterest | Medium | Quora | Reddit | Telegram Channel

Leave a Comment

Hey.lt - Nemokamas lankytojų skaitliukas