IronFX on The VIX: Introducing the efficient capital market “fear guaging” tool for analysts


The VIX is the CBOE’s volatility index, and it presents 30-day volatility forecasts, explains IronFX. The VIX index is updated continuously, giving 30-day volatility forecasts for the S&P 500 with this effective tool.

The VIX index was first introduced in 1993, and the current version was created in 2003. Many see the VIX as a “fear index”, explains IronFX, since there is a high correlation between market volatility and index movement. Thus, some say the VIX serves to measure fear on the market.

Many analysts claim the VIX is an efficient means for early understanding of market movement, since many brokers worldwide are active therein, states IronFX. However, some believe the VIX should not be used to predict market movement and that the index itself follows movement, and not the other way around.

Over the past few years, the VIX has reached its peak in the 2008-2009 market crash.

The VIX’s movement runs from 0-100 and stems from options pricing on the S&P 500 index.

Futures on the VIX are usually defined as contango, meaning, the further away the date of the contract, the higher its price, explains IronFX. The condition opposite to contango is called “backwardation”, and it means that the price for closer contracts is higher than for that of further ones. This happens when market pressure is very high, says IronFX.
Another characteristic of the VIX is the “return to average”. Meaning, it tends to go back to average levels after extreme movement in any direction. The average range is usually 15-20 base points. This characteristic is what makes the VIX an effective index for day traders or short-term traders, but creates problems for long-term traders or trend-based investors.

Possible VIX trading devices are:

  1. Futures contracts – Futures for the VIX are continuously traded electronically on the CBOE.
    VIX futures are a speculative position on the VIX’s inherent standard deviation and can serve to hedge accounts.
  2. Options – Futures options can be traded; this trading is conducted in accordance with the standard trading of futures options, directly on the index.
    VIX options were first traded in 2006 as standard options on ETFs and shares. The options can be used to manage risk or for speculative trading.
  3. VIX ETFs – Many ETFs are offered by the largest market suppliers. The ETFs offer options for long or short positions, both leveraged and non-leveraged, explains IronFX.

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