VIX Index “The Indicator of Fear”

Do you know what the VIX Index is?

The vix-index or indicator of fear as it is known, is an indicator created in 1993 by the CBOE (Chicago Board Options Exchange) that measures the volatility of 30-day futures contracts made on the SP500, making it a psychological index. Thanks to these futures contracts, the VIX can measure the variation that the markets expect the American stock market to have in the next 30 days.

It wasn’t until 1992 that the Chicago Board of Options Exchange began its own research on volatility and the creation of an index based on it. Their goal as a stock exchange was to create an index based on options volatility that was available for VIX trading and not just an indicator for financial analysts.

Thus, the VIX volatility index was created in 1993 thanks to the work of Professor Whaley.

How to analyze the VIX Index?

In the markets, volatility represents confidence or fear.

  • When the VIX tends to 0, it reflects a feeling of investor confidence in the US economy.
  • When the VIX tends towards 100, it reflects pessimism or fear on the part of these same investors.

There are three levels of scope in the VIX cboe:

  • Between 0 and 20: There is little volatility in the market, investors are confident and the S&P500 is initially in an uptrend.
  • between 20 and 30: Investors start to worry, leading to volatility, the SP500’s uptrend may continue but also start to reverse.
  • Between 30 and 100: it’s panic on the part of investors! Volatility is particularly high and we are probably seeing a sharp correction or even a collapse in the prices of the SP500 and the major stock indices.

These levels can be adjusted according to your view of the markets. Some more cautious investors prefer to use the ranges: 0-15, 15-25 and 25-100, while more speculative investors prefer to consider the price ranges 0-25, 25-40, 40-100.

As long as the VIX is falling, stocks will rise. Therefore, when the VIX is very low without much room to fall, you have to pay attention to possible turns, since the falls in the stock market will be very large. On the contrary, a VIX that is going up a lot means that the stock markets are falling… so if the VIX reaches very high levels and turns around, you have to wait to enter an undervalued market.

How to trade using the VIX Index?

If you are an options trader, surely you can get a lot of information. I am not, I do something in options but I do not fully dedicate myself to this topic.

If, on the other hand, you do day trading, as is my case, the vix-index It is useful to see when volatility increases, because extreme volatility makes my job enormously complicated.

The more volatility, the price moves faster and with much more amplitude, therefore, it is more difficult to trade because the stops are very far away and very large accounts are necessary.

If, for example, you are used to trading with very tight stops (1 point on SP500 or 3 on Nasdaq), these days the stops will jump very easily due to the nervousness of the price.

The VIX volatility index (Volatility Index) is a favorite of investors who trade US indices, stocks and ETFs (Exchange-Traded Funds). Opening a position on the VIX S&P500 is as simple as opening a trade on any other index CFD (Contracts for Difference).

Sounds interesting to you, right? Keep learning trading with DTP with upcoming articles on our Blog.

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