STRATEGIES EQUITIES 98 WALL STREET’S FEAR gauge was all but dead last summer, dropping to a seven-year low in early July. By October, the VIX Index had tripled as shares tumbled on fears of Ebola and sectarian violence in the Middle East. The Chicago Board Options Exchange Volatility Index, as the gauge is formally known, rises when U.S. stocks fall, and it topped out at 31.06 on Oct. 15, a three-year high. The number translates to an an- nualized percentage point change in the Standard & Poor’s 500 Index during the next 30-day period. THE HIGHEST VIX readings occur when inves- tors anticipate huge moves, either up or down, in equities. Its peak during the past decade was 89.53 on Oct. 24, 2008, a month after Lehman Brothers Holdings Inc. filed for bankruptcy. Elevated readings usually occur after a market selloff, while low levels are typically seen amid a rally. Investors can use the VIX to analyze the trading history of stocks and come up with buy and sell triggers. A hypothetical long-and-short strategy derived by backtesting and optimization tools on the Bloomberg Professional service de- livered a profit of 193 percent from Jan 1, 2000, to Nov. 26 versus a 48 percent return with a buy- and-hold approach. To demonstrate this, first type BT <Go> for the Advanced Backtesting & Optimization function and click on New Strategy on the red tool bar. On the next screen, enter SPY in the security field in the upper-left corner of the screen and select the first option in the list that appears: the SPDR S&P 500 ETF Trust, the largest exchange- traded fund tracking the benchmark index. Click on Add Se- curity/Datafield and then on the box to the left of Use Additional Se- curity so that a check mark appears. Enter VIX in the SECURITY field and select the first option in the list that ap- pears. Enter VIX in the NAME field. In the FIELD field, enter LAST and select Last Price from the list that appears. Then click on Update. Now, let’s create some parameters for the VIX. Click on Add Variable. In the pop-up screen, enter 40 in the VALUE field and then click on Update. Go through the same steps to add another variable with a value of 10. We’ll create the trading strategy by defining our rules. Click on Add Rule in the cen- ter left of the screen. Click on the first arrow under Action and select Cover and Go Long. Select When under Qualifier, if it isn’t already selected. Click on the arrow to the right of When and select VIX. Un- der Condition, select Crosses Above. Click on the arrow to the right and select Variable1, which rep- resents our high threshold of the VIX, at 40. Click on the second arrow below Action and se- lect Close and Go Short. Going left to right, select Trading the Fear Index Type VCA <Go> for data on volatility and correlation. Type BT <Go> to test trading strategies for assets such as the SPDR S&P 500 ETF Trust. BY IAN McFARLANE