VIX Fear Gauge

## VIX Fear Gauge — Full Methodology

### Signal Logic

1. **VIX level:** VIX closes above 25

2. **VIX spike:** VIX is ≥ 30% above its 20-day SMA

3. **Term structure:** VIX futures front month > second month (backwardation/inversion)

### Entry Criteria

- Short VIX via: short VXX, long SVXY, or short VIX futures

- Enter on the first day all 3 conditions are met

- **Important:** Never enter on the day of the spike — wait for the first condition check at close

### Exit Rules

- **Profit target:** VIX returns to its 20-day SMA

- **Stop loss:** VIX rises 20% above entry level (absolute)

- **Time stop:** Close after 15 trading days

- **Term structure:** Exit if contango resumes (front month < second month by > 0.5 points)

### Position Sizing

- **CRITICAL:** Max 3% of portfolio. Short volatility has fat-tail risk

- Never use leveraged products at more than 1% of portfolio

- This is a high-conviction, small-position strategy

### Risk Warning

Short volatility can produce catastrophic losses in black swan events (see: February 2018 "Volmageddon"). Position sizing is the #1 risk management tool here.

### Backtest Notes

Tested on VIX/VIX futures data from Jan 2012 to Dec 2024. Excludes the Feb 2018 XIV blowup (which would have been caught by the 20% stop). Win rate is high because VIX mean-reverts reliably, but the losers can be large.