What Are VIX Futures Telling Us Now? Traders’ Insight

Many StatPro clients use the VIX and other volatility-based indices as part of a multi-factor approach to risk management. These clients use our Revolution Risk modules to stress volatility indices like the VIX to observe how other market drivers would respond, and then apply those stresses to their own portfolios. Stress testing using the VIX helps market participants estimate the impact of dynamic shocks to volatility on their portfolios. The average spread during the period from January 2011 to November 2017, shown in the horizontal red line, is 3.3 points over an average VIX value of 16.

This is the perspective over six decades examining the 3 prior record low volatility periods and there are much shorter term measures to consider that may continue to work well in any market condition. The chart below from Tuesday, January 30th shows the anomalous pattern as illustrated to members of Value & Momentum Breakouts on that day. This was at a point where I had identified another strong move in the VIX that benefited a long position in (TVIX) the VelocityShares Daily 2x VIX Short-Term ETN and was looking to anticipate an exit point for subsequent retracement. The levels of implied volatility across a wide range of options were historically low, almost freakishly so. We see a very different setup now, with rampant call speculation pushing implied volatilities – particularly on out of the money calls – to levels above historic norms. But it is important to remember that while history doesn’t repeat, it often rhymes.

1. Remember the VIX is not set by any one person or even groups of people; it is solely determined by order flow of all buyers and sellers of options.
2. Commodity and historical index data provided by Pinnacle Data Corporation.
3. The second method, which the VIX uses, involves inferring its value as implied by options prices.

CBOE launched the first VIX-based exchange-traded futures contract in March 2004, followed by the launch of VIX options in February 2006. Since the possibility of such price moves happening within the given time frame is represented by the volatility factor, various option pricing methods (like the Black-Scholes model) include volatility as an integral input parameter. Since option prices are available in the open market, they can be used to derive the volatility of the underlying security. Such volatility, as implied by or inferred from market prices, is called forward-looking implied volatility (IV).

Subscribe to Kiplinger’s Personal Finance

However, even though the U.S. stock market (DIA - News) has declined from its April highs, it's still ahead on a year-to-date basis. The VIX is still hovering near yearly lows at $17.72 and giving a great trading setup. Investors following the news might be perplexed by this apparent contradiction, but the ETF Profit Strategy newsletter sees it as an opportunity.

Though it can’t be invested in directly, you can purchase ETFs that track the VIX. When its level gets to 20 or higher, expectations are that volatility will be above normal over the coming weeks. The VIX, which was first introduced in 1993, is sometimes called the “fear index” because it can be used by traders and investors to gauge market sentiment and see how fearful, or uncertain, the market is. The VIX typically spikes during or in anticipation of a stock market correction. The VIX index tracks the tendency of the S&P 500 to move away from and then revert to the mean.

Friday's Triple Witching Hour Comes Into Play: Traders Brace For Volatility As Derivatives Worth $2.7 Trillion Expire

As the derivatives markets matured, 10 years later, in 2003, the CBOE teamed up with Goldman Sachs and updated the methodology to calculate VIX differently. It then started using a wider set of options based on the broader S&P 500 Index, an expansion that allows for a more accurate view of investors’ expectations of future market volatility. A methodology was adopted that remains in effect and is also used for calculating various other variants of the volatility index. The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility.

As options trading became rampant, hedgers who remembered that a Nonfarm Payrolls report was due the next day sought protection in longer-dated options, some of which pushed VIX higher. The following day’s report was disappointing, stocks fell, and February 2nd remains the high for 2023 thus far. The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers.

Evolution of the VIX

Because the S&P 500 includes so many large companies across several different market sectors, it is generally viewed as a good indication of how the U.S. stock market is performing overall. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. That much is understood by most investors, but what exactly is volatility and how is it measured for the overall stock market? You may have seen references to something called the VIX, an index that measures volatility, during times of extreme financial stress.

We know that the market will not consolidate [form a wedge] indefinitely and when it does break out (up or down), it could be a violent move. We cannot see the energy in that spring, but we know it is there and when the energy is finally released it moves fast and violently. How much power is needed and how long that power can last to keep that spring contracted is something that physics can answer; however, in the market that equation is driven by supply and demand. In many cases it is a catalyst event that unleashes the power as one side steps away and forces the other side into full capitulation.

What does it mean when the VIX goes up?

SPX options are a combination of standard SPX options that expire on the third Friday of each month and weekly SPX options that expire on all other Fridays. To be included, an option must have an expiry date between 23 and 37 days from the time of calculation. It is sometimes easier to think of trading VIX options opposite of how you would trade the options in the S&P. If you think the S&P is heading sharply lower then purchasing VIX call options would benefit. If you think the S&P is heading sharply higher then purchasing VIX put options would benefit.

When traders become too fearful, they clamor for volatility protection. The nervousness can persist for some time, but once VIX puts in a clear top, it usually means that the worst of the crisis has passed. It shows the level of VIX plotted against the subsequent one-month change in SPX. It is not a perfect correlation, but VIX’s contrarian nature should be quite clear. Any information posted by employees of IBKR or an affiliated company is based upon information that is believed to be reliable.

History shows, however, that complacent investors may be punished with falling prices, unless they heed the warnings of this quite reliable indicator. Figure 1 shows the VIX, in the summer of 2003, flirting with extreme lows, dipping to near or below 20. A look at Figure 2 should be an eye-opener, as it shows that each time the VIX has declined below 20, a major sell-off has taken place shortly after. Whenever the VIX dips below 20, the stock market marks a medium-term top.

The recent shock exposed years of complacency that arise from enjoying more than 370 consecutive days consistently trading within 5% of market highs. The market anomaly of low volatility is over for now, how investors to respond this may follow many other previous events of smaller magnitude. To begin to answer that important question let's first take a much closer look at the VIX exchange traded funds that have been used for years now to exploit a very consistent and profitable anomaly. The ETFs, the trades, and the scope of the transactions may help put some events in better perspective. Beyond the opportunity to trade the VIX using options, there are a number of ETF/ETNs available to profit from both long and short moves of the VIX.

Understanding it all can be complicated, so let’s take a closer look at what it means. Volatility is one of the primary factors that affect stock and index options’ prices and premiums. As the VIX is the most widely watched measure of broad market volatility, it has a substantial impact on option prices or premiums. A higher VIX means higher prices for options (i.e., more expensive https://forexhero.info/ option premiums) while a lower VIX means lower option prices or cheaper premiums. The first method is based on historical volatility, using statistical calculations on previous prices over a specific time period. This process involves computing various statistical numbers, like mean (average), variance, and finally, the standard deviation on the historical price data sets.

They will be buying low when the underlying declines and selling high when it rises. The more opportunities the trader gets to hedge, the more likely it is that the accumulated profits from those hedge rfp template for software development trades will exceed the amount that the options decay, resulting in a profit. That trader would prefer frequent movement in either direction and thus, more chances for profitable hedge trades.

Look for the S&P 500 to stabilize within the current eight year price channel, hopefully closer to the upper range of the channel and not a retest of slower 200 day moving averages. Volatility into 2018 is likely to be higher than what we have experienced in at least the last five years. At that point in time the question being asked was when to take profits from the TVIX trade and whether the VIX would reverse below 14 and return to its previous pattern with values below 10. On the prior day of January 29th, the TVIX had signaled a strong technical buying opportunity with both the RSI (relative strength index) and MFI (money flow index) crossing above 50.

I can see three potential problems surrounding the bill’s passage that could be causing unease. First, the bill could take longer to become law than originally anticipated. Markets appear to have priced in the imminent, speedy passage of the bill, but in light of the objections that we noted, that might be a more time-consuming process than we thought. Investors appear to have been pricing in a minimum of $1400 checks and a wide range of other economic support. Again, if the negotiations continue to find new sticking points, those may turn out to be resolved via compromises that would dilute the bill’s effectiveness.