VIX is a common abbreviation for the English term Volatility Index. This indicator reflects market participants’ assumptions about future market volatility over the next thirty-day period. The general pattern shows that when the market crashes, the volatility index increases, and when the market grows, the opposite trend is observed.
The VIX is often referred to as the fear index. This name has been corrected because the critical values of the indicator can be used to judge the general mood of traders.
Values below 20% indicate a low level of volatility and optimism from traders. They expect a trend reversal in the near future and look to close trades before the reversal begins to lock in profits.
Fluctuations in the region of 20-30% indicate an average level of volatility and do not give significant market signals.
When the index values exceed the 40% threshold, we can speak of a growing panic. Asset prices are falling rapidly and this may be a signal to look for a market entry point and open long positions.
Correlation of the VIX with the S&P 500 Index
The VIX is listed on the Chicago Board Options Exchange (CBOE). Initially, the underlying asset was an option on the S&P 100. In 2004, the VIX began to be calculated based on the volatility of the S&P 500. This US stock index includes shares of 500 companies in key sectors of the US economy. Significant shares are held by financial, IT and industrial corporations. Based on their quotes, you can judge the state of the economy as a whole.
The VIX calculation is based on data on call and put option contracts in the S&P 500. The Black-Scholes formula is used for the calculations.
How to trade the volatility index
You cannot trade the index itself, so traders use VIX futures and options to capitalize on the dynamics of these instruments. The first VIX futures were issued in March 2004. Later, in February 2005, options appeared. Due to the negative correlation with stock market indices, VIX futures contracts are a good option for hedging positions in the stock market.
Fundamental and technical analysis tools are used to make financial transactions.
Fundamental analysis when trading the VIX
Since the volatility index is sensitive to market conditions and signals traders’ anxiety, it reacts to economic events and political decisions that affect the financial markets. The price of VIX depends on:
- federal regulations;
- PIB de EE. UU.
- consumer’s price index;
- US labor market report;
- international business transactions with China.
To perform high-quality fundamental analysis to help make the right trading decision, a trader must study the asset being traded and the economic realities that may be associated with this asset. For objective information, you need to select reliable daily news channels from central banks, financial and political bodies, use the economic calendar.
VIX business hours are Monday through Friday from 15:00 to 00:00 Moscow time.
Technical analysis when trading the VIX
Trading platforms are used to evaluate historical data and market trends. They have built-in technical analysis “sensors” that display real-time price charts for selected timeframes. To analyze trends, set intervals H1, H4, D1, or W1 more frequently. The longer the time frame, the more convenient it is to assess the trend.
The popular moving average indicator helps determine the direction of the trend. In an uptrend, the price rises above the stat. Going down, the price curve is below the moving average.
To get the full picture, analyze the short-term and long-term trend. The VIX intraday chart marks price reversals during the trading day. A trader studies a short-term trend in the time frame in which he is going to open a trade. Moving averages, used to assess the daily and weekly VIX, measure long-term changes in market dynamics. To confirm a downtrend or uptrend, as well as follow a change in price direction, it is better to use moving averages with different periods, for example, 20 and 50.
Price movement analysis helps interpret potential changes in the VIX. It is useful to study breakouts of local lows and highs on the chart.
The most effective in trading is summary technical analysis using different methods.
Today, the fear indicator is considered by many traders to be a controversial indicator that does not provide reliable data for forecasting. However, it helps to see from the outside what is happening in the stock market and to determine the market cycles during the exercise. In addition, derivative products linked to VIX create a new asset class and expand trading opportunities.