The VIX index, also known as the volatility index measures the volatility of Chicago Market Options (CBOE or Chicago Board Options Exchange) on the S & P 500 index (Standard & Poor’s 500).
The VIX represents the volatility of call options and put options with monthly and weekly expiration on the SP500.
The value of the price of the VIX reflects a measure of volatility in percentage, its quotation is therefore limited between 0 and 100.
Not very concrete as a definition? Let’s take an example:
If the price of the VIX is 15, it means that the volatility of the monthly and weekly options on the S&P 500 is 15%.
Investors therefore expect the price of the S&P to increase by around 15% during the year.
According to a calculation method redefined in 2003 (in 1993 it was based on the S & P 100), the VIX is obtained with the weighted average of call options (call) and sell (put) the S & P 500.
The VIX therefore measures expectations, or rather the sentiment of investors intervening on the main American equity markets.
There are also volatility indicators based on stocks listed exclusively on the Nasdaq (VXN), or on stocks listed in the Dow Jones Index (VXD).
Value and Interpretation of the VIX Index
The VIX index is also commonly called the investor sentiment index, fear index, VIX Index, CBOE VIX or even S & P500 VIX .
The VIX measures volatility on the largest American stock market index, the S&P which groups 500 companies, which makes it a psychological index.
In the markets, volatility represents confidence or fear.
Thus, when the VIX tends towards 0, this translates a feeling of investor confidence in the US economy, on the contrary when the VIX S & P500 tends towards 100 it reflects the pessimism or the fear of these same investors.
There are three range levels on the VIX CBOE
- Between 0 and 20: there is little volatility on the market, investors are confident and the S & P500 in a bullish trend in principle
- Between 20 and 30: investors start to worry which leads to volatility, the upward trend of the SP500 can continue but also start to reverse
- Between 30 and 100: panic on the part of investors! Volatility is particularly high and we are probably witnessing a sudden correction or even a collapse in the prices of the S & P500 and the main stock market indices.
These levels can be adjusted according to your vision of the markets.
Some more cautious investors prefer to keep the ranges: 0-15, 15-25 and 25-100, where the most speculators prefer to consider the price ranges 0-25, 25-40, 40-100. Train on a demo account to make up your own mind.
How to Analyze the VIX Index
- VIX Trend Analysis
- Price Action VIX Analysis
- Fundamental Analysis of the VIX
Like all financial instruments, the VIX responds well to technical and graphical analysis.
But its particularity, as an index of volatility, makes it responds particularly well to fundamental analysis as well as economic announcements.
SP500 VIX Trend Analysis
Start by choosing an important time unit like H4, D1, W1 or MN.
The larger a unit of time, the more relevant the trend identified.
However, it may be wise to use a large unit of time that is not too far from the unit you are going to trade.
For example, if you want to trade on a chart in H1, it is more relevant to monitor a trend in H4 or D1 than on W1 or monthly.
If you want to invest in H4, it is more relevant to analyze the underlying trend in D1 and W1.
The Moving Average indicator over 100 or 200 periods is an excellent trend indicator.
It is used by many investors and vix traders since it allows to quickly identify a trend:
- Upward trend: prices move above the moving average and the latter is trending upwards
- Bearish trend: prices move below the moving average and the latter is trending downwards
Once you have identified your long term trend, it is time to get interested in the short term trend.
Indeed, if the long term trend gives us an interesting vision of what has been happening on the VIX for several days or weeks, it is important to know what is currently happening in the short term. Even in a downtrend, there are bullish correction phases! And vice versa.
You have two options:
- Study the short-term VIX trend in the same time units as the long-term trend (in our example, in H4)
- Study the short term trend on a lower time unit (for example in H1 if you have studied the long term in H4)
You can again use moving averages for example, but this time for periods 20 and 50.
If the moving average 20 is lower than the moving average 50 in a downward trend, this confirms the continuation of the decline in the short term, conversely if the moving average 20 is higher than the moving average 50 this confirms the rise in the short term on the course VIX.
On the other hand, if the moving average 20 is lower than the moving average 50 in an uptrend, this implies a short-term downward correction or potential start of a trend reversal.
The interpretation is the same for a moving average 20 below the 50 in an uptrend on the VIX.
VIX Index Price Action Analysis
The VIX is also sensitive to price analysis, which can help you interpret potential movements in the VIX volatility index.
The easiest way to start is to study the breaks in recent lows and highs on the VIX chart.
If the price of the VIX breaks the last trough of the graph, the closing of the candle indicates a desire to continue the decline.
Conversely, in the event of an upside breakout from the last peak, confirmed by the close of the candle, then the price action will confirm the pressure from buyers to continue raising prices on the VIX.
For a more in-depth study of price action, you can also monitor the configurations of Japanese candles and candlesticks , as well as the establishment of a Dow theory or Elliott waves!
VIX Index Fundamental Analysis
Let us not forget that the VIX is above all an indicator of volatility and the index of fear on the markets!
As a result, it is also particularly sensitive to economic announcements and the geopolitical context that intervene on the markets.
In the main economic announcements that have an impact on the price of the VIX we find:
- US GDP
- The US Consumer Price Index
- The FED Minutes
- Employment figures in the USA
But not only! In the current context, we can also highlight the role of the trade war between the USA and China.
The trade war, and other major geopolitical events also had a strong influence on VIX prices, not to mention the announcements from the FED (American Central Bank).
It is therefore important to monitor market news.