VIX

What is the VIX index

The VIX is a measure of the Implied Volatility of S&P 500 index options. The VIX is quoted in percentage points and is the expected movement in the S&P 500 index over the upcoming 30-day period, which is then annualised.

VIX Example:

If the VIX is 14, it represents an expected annualized change of 14%% over the next 30 days. This means that the market expects that the S&P 500 will move up or down by 14% / (√12) = 4.04% over the next 30-day period.

How to use the VIX index

MacroVar monitors current VIX levels versus VIX historical z-score values. VIX levels represent different market volatility environments:

  1. VIX less than or equal to 12: Extremely “artificially” low volatility environment, often leading to volatility surprises in the near future
  2. VIX greater than 12 and lower than 16 (1 z-score): low volatility environment, which has historically coincident with good stock market performance
  3. VIX greater than 16 and lower than 18: medium volatility environment, warning of rising volatility
  4. VIX great than 18: high volatility environment, high risk

Why is the VIX index important

During low volatility regimes traders structure their portfolios by identifying long-term trading opportunities with timeframes between 1 to 3 months. However, during periods of high volatility, traders adjust their investment portfolios by closing existing long-term positions and shift their portfolio to shorter-term trading positions with timeframes between 1 day to 1 week.

Low volatility periods are characterized by VIX values less than or equal to 15. Low volatility periods have historically occurred 80% of the time. During this market risk regime, long-term trading opportunities are identified between 1 week to 3 months.

High volatility period are characterized by VIX values equal or higher than 20. High volatility periods have historically occurred 20% of the time. During this market risk regime, short-term trading opportunities are identified between 1 day to 1 week.

Very high implied volatility means very high uncertainty in either direction. Oversold markets can snap back as fast as they dropped.

This means that successful portfolio managers are portfolio managers 80% of the time and day traders 20% of the time.

VIX Index Analysis

MacroVar monitors current VIX levels versus VIX historical z-score values. VIX levels represent different market volatility environments:

  1. VIX less than or equal to 12: Extremely “artificially” low volatility environment, often leading to volatility surprises in the near future
  2. VIX greater than 12 and lower than 16 (1 z-score): low volatility environment, which has historically coincident with good stock market performance
  3. VIX greater than 16 and lower than 18: medium volatility environment, warning of rising volatility
  4. VIX great than 18: high volatility environment, high risk

MacroVar monitors the following factors which have historically predicted future VIX levels:

  1. VIX seasonality
  2. VIX Commitment of Traders Report
  3. VIX compared to US 2s10s yield curve
  4. VIX versus CDX (credit default swap index)
  5. VIX versus LIBOR-OIS spread
  6. VIX versus US Manufacturing PMI

You can monitor the current VIX levels and factors affecting the VIX by clicking VIX Chart.

VIX is one of the major tools used in portfolio management. VIX is combined with VIX volatility term structure and  VSTOXX which is used to monitor European equity risk. Check our guide on portfolio management to identify trading opportunities across all asset classes.

S&P 500 and Volatility

Historically VIX levels of less than 17 have coincided with risk on periods and good stock market performance. VIX levels higher than 17 have indicated high risk and poor stock market performance.

You can monitor the current VIX levels and factors affecting the VIX by clicking VIX Chart.

VIX is one of the major tools used in portfolio management. Check our guide on portfolio management to identify trading opportunities across all asset classes.

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