CBOE Volatility Index VIX Trading forecasts and signals

Japan's Nikkei (+0.1%)China's Shanghai Composite (-0.3%)South Korean Kospi (-1.4%)Hong Kong Hang Seng (-1.1%)Australian ASX (+0.5%)The main thingsThe next trading week goes to the players' piggy bank for promotion. The US market does not get tired of rewriting the highs, the volatility of the indices is still low, overbought is ignored. This indicates the lack of a proper driver for the fall of risky instruments.The raging inflation and the recovery of the US labor market, which act as benchmarks for the Fed's monetary course, could have been the incentives for the index reversal, but price pressure weakened in July, and the spread of new strains of the virus restrains the regulator from sudden movements.Commodity assets are stabilizing after a significant dip in the first half of the week. Oil futures are trading near $71 per barrel of Brent. Consolidation above the level will give strength to the bulls in the short term, but it is unlikely to change the medium-term trajectory of commodities.Asian marketsIn the Asia-Pacific markets, there is a significant discrepancy in the dynamics of country stock indices.China's Shanghai Composite is down by a third of a percent, and the Hang Seng index of autonomous Hong Kong is falling by more than a percent. Nevertheless, the market panic at the end of August has been largely stopped, and the composite benchmark of Chinese shares is preparing to close the week above the bar of 3,500 p., which is somewhat surprising — macro statistics give an unambiguous conclusion about the slowdown of the Chinese economy, and regulatory risks, judging by the "Plan 2025" project, remain.The NBK stands on the protection of the market and the expectations of expanding the liquidity of the financial system, but the statistics of the banking sector indicate the unwillingness of credit institutions to invest in a stagnant economy experiencing a natural lull after the rapid post-pandemic recovery of 2020-early 2021.According to the set of introductory data, the Shanghai Composite's July drawdown is rather technical in nature — the bears are ready to return at any moment.South Korea's Kospi is falling by 1.5% amid sales of the high-tech sector, and in particular a sharp decline in the index heavyweight Samsung (-4%). The composite benchmark of the stock market fell to the levels of the end of May.Of course, the market today is dominated by an internal story caused by the UDO of the vice president of the corporation, but also macrostatistics from the labor market, signaling an increase in the probability of the end of the Korean soft monetary cycle, and China's plans to tighten regulation of the high-tech sector, influence the buyers' positions.Thus, the multidirectional dynamics of the Asia-Pacific markets today does not give a clear signal for the opening of European platforms. However, the overbought risk capital markets still indicate a temporary pause in the rise of European benchmarks on Friday.American sitesA characteristic feature of a strong trend, in our case an upward one, is the low responsiveness of the market to the negative and the rapid wagering of the positive. If data on July fading inflation was released on Thursday and the stock market cheered up, because it regarded the fact of slowing price pressure as a factor in the continuation of the Fed's monetary policy, then yesterday's metrics on production inflation, reflecting a further rise in prices, were simply ignored by investors.As a result, the trading week ends with another victory of the bulls, and the S&P 500 broad market index marked another peak above 4460 p. The next landmark, unless something unexpected happens, is the round mark of 4500 p.In the morning hours of Friday, the futures for the index of the same name are running above 4450 p., and the VIX volatility indicator fell to the lows of the year, which again refuses to support players to lower the overheated stock market.The main marker for the Fed is still the situation on the labor market, because the authorities judge the recovery of consumer activity in the country by the dynamics of employment.Yesterday's data on the number of applications for unemployment benefits again reflected an improvement: the number of people in need of state support fell to 375 thousand, this is very close to the record June lows of 368 thousand. from the post-pandemic period. The risk now is the third wave of the virus, so investors shrugged off the positive, threatening to intensify conversations about curtailing the quantitative programs of the Federal Reserve.Thus, American bulls continue to get richer, and bears are forced to wait for the actual steps of the Fed to prevent the economy from overheating. Only a slowdown in the pumping of the market with liquidity can shake the positions of players to increase, but this is not happening yet. From a technical point of view, it will be possible to talk about the activation of bears only after the return of the S&P 500 under 4430 p.CommoditiesOil prices are declining at Friday's trading within a percentage. By the standards of the volatility of the instrument, such a deviation is insignificant. October Brent futures — $70.7.In general, the trading week will be remembered by the participants of the commodity market with an extended amplitude of fluctuations in oil prices. As expected, the contracts managed to register at the lows of the month, under $68 per barrel, and rebound to $71.The factors of influence are the same - issues of OPEC+ quotas, the dynamics of the incidence of mutating coronavirus, trends in macro indicators of the Asia-Pacific region and inflation in the States.The introductory conditions of the energy market allow for the preservation of high volatility of exchange-traded instruments, with an attempt to further rebound futures, nevertheless, the medium-term trajectory has been chosen - the attenuation of pro-inflationary factors is likely to intensify, which will continue to dominate the commodities ...

The fear index really allows you to make money on investor sentiment. While some are starting to panic, others are taking advantage of the turmoil. Here's how it worksInvestors always want to anticipate price movements. To do this, they use different methods with varying degrees of scientific and useful. One of the ways is to use leading indices, which include volatility indicators .The most famous of these indicators is the VIX Volatility Index of the Chicago Board Options Exchange (CBOE). It is also known as the fear index.How the VIX Fear Index worksAnalysts and investors using the VIX believe that it measures the market mood regarding future volatility. In other words, this index demonstrates the level of investors ' fears about future market movements.Knowing the degree of investor concern now, we can assume in which direction the aggregate investor sentiment will direct the quotes.How are these concerns measured? The main idea, according to which the volatility indicator is used, is that the calculation of the indicator is based on the prices of options. Therefore, to understand how this works, you need to understand how the option works.Read more: Volatility: types, how to track and how to useWhat is an option?An option is a specific exchange contract that gives the investor who bought it the right to buy or sell an exchange commodity at a certain price. In a classic exchange transaction, we are talking about an obligation, not a right.Because of this property, the option is often used for market insurance of investments. How is this achieved? Let's look at how options are used on the example of oil.Oil option: calculation exampleLet's say a trader buys oil at the price of $63.2, at the same time an investor buys an option for the right to sell oil at $63.2 (the exercise price of the option), paying a certain amount for it — a premium on the option (software). Let the software amount to $1.5. Having this right, the trader insures his investments in case the price falls.If the oil price rises to $70, the trader will receive $6.8 from each lot. After subtracting the software in the amount of $1.5, the investor's net profit will be $5.3.But if the price of oil falls to $55, then the trader can use the right that the option gives him and sell his oil at $63.2. Then the investor will lose only what he paid for the option — exactly $1.5.Such an option for the right to sell is called a put option. An option for the right to buy is called a call option.It is clear that at the oil price given in the example, a put option at $64 will cost more than at $63.2. Traders who sell exchange-traded goods are engaged in the same risk limitation. Some of these players open a short position when selling .These traders generate demand for call options. Accordingly, the current ratio of sellers and buyers, as well as their moods and expectations of future price movements, will manifest themselves in the prices of put and call options. Thus, by measuring the prices of options, it is possible to numerically determine the investor sentiment of the relative price movement.And what does the nervousness of investors have to do with it?The VIX indicator is based on this pattern. It uses the prices of options on the S&P 500 index for calculation. Thanks to index funds ETFs and index futures, the S&P 500 has to some extent become an exchange-traded commodity itself.The more investors are afraid of the market falling, the more the premiums for put options grow and the premiums for call options decrease.On the contrary, if the market is confident of growth, then the premiums for call options will increase, for put options they will decrease.But if the market is not sure of the direction, then most participants are afraid of unforeseen movements and are insured against them. This will manifest an increase in the premiums of all options — both put and call.The index is calculated in such a way that the larger the size of the premiums, the greater the value of the VIX index.Read more: What are futures: types, features, advantages and risksFear scale from 0 to 100In theory, the values of the VIX index are located on a scale from 0 to 100. The index has been calculated since January 1990. The index reached the maximum value in the history of 89.53 points on October 24, 2008, and the minimum value of 8.56 points on November 24, 2017. Most often, the indicator values are in the range from 15 to 40.If the indicator value is below 20 or 15, then investors ' fears about the market fall are small. This means that the markets are in a growing trend in the medium and long term. The very decline of the VIX below 20 can be perceived as a reason to think about buying American securities for the long term.If the indicator value exceeds the level of 70-80, then theoretically this should mean that traders are trying to insure themselves as much as possible. And not only from fluctuations, but also from a deep drop in the market.After the indicator reached its maximum values in October 2008, the US indices continued to decline, reaching the bottom in March 2009. It should be noted that in practice, the indicator took values above 50 for its entire history only from October 2008 to March 2009 inclusive. Therefore, in fact, it was no longer possible to use it to predict the entry into a downtrend.Most often, traders prefer to focus on the upper limit of 45. Finding the indicator above 45 means that the level of fear in the market is quite high and it is worth refraining from buying for now. However, it is still not worth taking overcoming these levels as a signal for sales.If you hold liquid American stocks in your portfolio, then an excess of the VIX value of 20 can serve as a signal to start selling. In addition, it is worth monitoring the local minima of the volatility index.Read more: How to invest in stocks and what you need to knowWhen the next local minimum of the index turned out to be greater than the previous value and at the same time the corresponding new values of the stock indexes (Dow Jones and NASDAQ) are greater than the values on the date of the previous local minimum of the VIX, this is the so — called divergence-divergence. In such cases, many investors close some of their long positions.More about VIX ...

Trading of a stock or forex trader is connected with probabilities and expectations. Before opening a trading position, investors try to get signals from the market. For this purpose, such tools are used. Indicators, graphical and wave analysis. Another tool used by traders is the volatility index.Content1. The concept or what it is in simple words2. VIX or Fear Index3. SummaryThe concept or what it is in simple wordsThe volatility index is a calculated indicator that reflects the expectations of market participants regarding the volatility of quotations of a particular exchange asset.Simply put, it is a measure or indicator of the mood of traders who reign in the market. Such an index is calculated based on the volatility of the current prices of options for the financial instrument under study.When the majority of traders calmly perceive the exchange situation, such an index falls to the minimum values. And vice versa. If there is panic in the market, investors expect an increase in volatility, then this indicator rises to the highs.Depending on the market, the investor evaluates a specific volatility index. For example, when trading on the American stock market, they focus on the VIX. Traders who earn money on Russian stocks study RVI.Read more: Volatility: types, how to track and how to useVIX or Fear IndexIn the mid-90s of the last century, the VIX index began to be calculated on the Chicago Stock Exchange. This is an indicator of volatility, reflecting investors' expectations from the US stock market for the next month. The calculation is based on the actual prices of option contracts for shares forming the S&P 500 index.The second name of the VIX is the fear index. The indicator reflects the mood on the stock exchange and the general direction of movement of quotations. Let's recall the saying: If the VIX is high, it's time to buy. When the VIX is low, look out below!The theory gives an unambiguous interpretation of the values of VIX. When this indicator exceeds the 40-point mark, there is panic on the stock exchange. Market participants do not invest in risky assets, but on the contrary, transfer money into reliable fixed-income instruments. At such moments, stock quotes show historical or global lows. Long-term purchases are interesting.When the value of the VIX index falls below the 20-point mark, a bullish trend prevails on the exchange. If quotes on financial instruments from the portfolio reach long-term highs, you should think about closing or reducing the held longs.At the same time, the fear index does not always reflect the market situation. For example, for the last few years, the VIX, regardless of the fluctuations of the S&P 500, is close to the minimum values. Even when the US stock market is in a bearish mood. Analysts associate this situation with the artificial pumping of the financial system with dollars.Read more: How to invest in stocks and what you need to knowTwo interpretations of the described trend are known. The first one is given by optimistic traders. They are talking about a new stock market trend, in which assets are constantly growing without any deep corrections. This is reflected in the absence of strong volatility and low VIX indicators.The second interpretation comes from pessimistic traders. These market participants see this behavior of the fear index as a signal for the collapse of world stock exchanges in the foreseeable future.In addition, there are known situations in which there is no inverse correlation between the VIX and S&P500 indices. The market updates the local maximum, and the fear index is in no hurry to show the minimum. Such a divergence often gives a preemptive signal for a reversal of the stock market trend.In practice, the VIX index is used by investors who work in the medium and long term. The indicator readings are used when analyzing the market situation and making decisions about closing positions and fixing profits.Read more: How to determine the beginning of the movement of the "bull" market?SummaryAny volatility index is a useful indicator of the state of the financial market. The analysis of such a tool helps to understand the mood that prevails on the stock exchange at the present time.At the same time, it is not necessary to consider the readings of VIX, RVI or other volatility index as a signal for immediate action. But it is not forbidden to add the readings of such an indicator to a trading system or ...