What Happens After an “Extraordinary” Big Fall in the S&P 500? (Volatility Trading Strategy)
What happens after an extraordinary big fall in SPY? Volatility trading strategies can be very profitable — both long and short. Let’s find out and test by using some simple variables. To measure a big fall we use the average difference between the high and the low over the last 25 days.
We made the following trading rules:
Calculate the average H-L range over the last 25 days (in percent).
If the ETF falls more than 2 times this average, enter at the close.
Exit at tomorrow’s open, tomorrow’s close, or after 3 or 5 days.
Test period from 2005 until July 2013.
The best exit is simply to exit tomorrow’s close. That has the best win ratio and is the least erratic. The other exits seem pretty unstable. The equity curve for SPY from close to open is shown below.
You can find more info about this trading strategy here:
https://www.quantifiedstrategies.com/what-happens-after-an-extraordinary-big-fall-in-sp/
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