My Authors
Read all threads
Yesterday’s thread was on SLVC (posted below) today will be on FGI.
Again, today’s thread will show historical performance, 2018 performance, where it did well and poorly, and why.

What is FGI?

The Fear vs Greed Index (FGI) is a measure that calculates a monthly relative sentiment in the market place using information from the option markets and the amount of open interest in call and put options.
GREED reflects too much risk taken on by investors and may indicate a future volatility shock or price reversion.

FEAR may show too much risk aversion in the market place and volatility should mean revert and/or a price recovery will take place.
NEUTRAL periods are non-predictive.

UNCERTAINTY (now called PANIC) periods should be met with extreme caution (or optimism) as the returns are highly variable, but are typically positive for and negative for
Investing (wisely) in periods of FEAR/PANIC vs GREED can lead to annualized return differentials of over 10%.

Now to the data and the decision-making matrix. I will be showing returns for , , and . I present returns for and separately as returns are a better proxy for option-based decisions. The decision matrix for FGI is
The FGI index is more relevant for #volatility decisions, as the market can sustain periods of GREED for many, many months. GREED can be a good scenario for the (see 2017) and it is better to be in the market long-term. That is why you don’t see a GO TO CASH for
The actions are taken at market close and held to next day market close.

So let show some historical performance. For those that worry about data snooping, the metrics were formed and derived on a theoretical basis, and then tested empirically. Data goes back to 1990
Green (red) highlights years of significant out (under) performance. Pink(light green) are positive (negative) years that under(over) perform. The chart posted (top of thread) shows cumulative value of a portfolio invested in the and the using the decision framework
How to interpret the results:

The simplicity of FGI is its ability to capture the basic properties in volatility mean reversion, and how it is applicable to both volatility products such as and the broad-based market - however...

11/ can get caught out (see 2008- it moved a little too early and 2011/2018 for VXX)

Also, because the isn’t directly investable, the returns shown are more representative of the quality in the decision matrix versus a bankable return.

So how did we do in 2018 for . I have put the metrics in a simpler format (red dots) where GREED=-2, NEUTRAL=-1, FEAR=0, and LONG VOL=1 so you can see when each decision is made. Using FGI for resulted in a .5% year and out performance of over 7%.
The performance using as a base was excellent, but for , a similar under performance as seen using SLVC for decisions. It why options vs futures/ETFs have to be viewed differently

Fear is a funny thing, and I would add in 2018, there was actually very little of it, I don’t think February was about fear (it was structural), and it only, kind of, reared its head at the end of the year. It is why the option plays in played out much better than
In general, the FGI metric tends to have a lot of power for #volatility trades, and I like to specifically look at this at the extremes (GREED vs FEAR/PANIC). Hit me up with questions-happy to answer them. Tomorrow I will go through the TVRP (Price) metric.
Missing some Tweet in this thread? You can try to force a refresh.

Enjoying this thread?

Keep Current with Volatility Professor

Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

Twitter may remove this content at anytime, convert it as a PDF, save and print for later use!

Try unrolling a thread yourself!

how to unroll video

1) Follow Thread Reader App on Twitter so you can easily mention us!

2) Go to a Twitter thread (series of Tweets by the same owner) and mention us with a keyword "unroll" @threadreaderapp unroll

You can practice here first or read more on our help page!

Follow Us on Twitter!

Did Thread Reader help you today?

Support us! We are indie developers!

This site is made by just three indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3.00/month or $30.00/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!