General

Who is this system intended for?

The Core Model was designed for active investors who have the discipline to stick to a process. Trying to anticipate signal changes or outsmart the model generally doesn’t end well.

How much of my portfolio should I invest in the Core Model?

The Core Model works well a replacement for equity exposure or as a speculative position held alongside a traditional stock/bond portfolio.

Should I use SVXY or SVIX for my short vol position?

If you’re replacing the equity exposure in your portfolio with the Core Model, you should use SVXY. If you’re dedicating a portion of your portfolio to the Core Model for speculation, use whichever you’re comfortable with. Just be sure not to overestimate your risk tolerance. Doing so may result in abandoning the process at the wrong time.

Technical

What is volatility?

Volatility measures the magnitude of price returns for a given asset over a period of time. Volatility can be expressed as realized (i.e., historical) or implied (i.e., expected). We care about the volatility of the S&P 500 index (SPX).

What is realized volatility?

Realized volatility is expressed as the standard deviation of an asset’s price return over a trailing time period. Measuring volatility over a 1-month (21 trading day) time window is often helpful.

What is implied volatility?

Implied volatility measures how large the market expects the future price swings to be for a given asset. The implied volatility measurement we care about is the CBOE Volatility Index (VIX).

What is the VIX?

The VIX is an index that expresses the market’s expectation of future volatility over the coming 30 days. This measurement is derived from options on SPX. The VIX is expressed as an annualized value with a long-term median of 17.75 and an all-time high 89.5.

What are VIX futures?

Futures are financial instruments that obligate parties to buy or sell an underlying financial asset at a predetermined future price and date. VIX futures tell us where the market thinks the VIX index will be at future dates.