How to read VIX futures?
The VIX tends to move in the opposite direction of the market. When the VIX is up it can mean that there is increased fear and risk in the market. Conversely, when the VIX is down it can mean that there is more stability in the market.
Introduced in 2004 on Cboe Futures Exchange℠ (CFE®), VIX futures provide market participants with the ability to trade a liquid volatility product based on the VIX Index methodology. VIX futures reflect the market's estimate of the value of the VIX Index on various expiration dates in the future.
What do VIX readings mean? In general, a VIX reading below 20 suggests a perceived low-risk environment, while a reading above 20 is indicative of a period of higher volatility. The VIX is commonly used to measure investor confidence in the market.
"If the VIX is high, it's time to buy" tells us that market participants are too bearish and implied volatility has reached capacity. This means the market will likely turn bullish and implied volatility will likely move back toward the mean.
India VIX most typically has a range of 15 to 35. So, any value above 35 indicates high volatility and any value below 15 indicates low volatility.
As a rule of thumb, VIX values greater than 30 are generally linked to large volatility resulting from increased uncertainty, risk, and investors' fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets.
You decide to open a position to buy the VIX with the expectation that volatility is going to increase. By doing so, you might balance out these positions. If you were wrong, and volatility didn't increase, your losses to your VIX position could be mitigated by gains to your existing trade.
The higher the VIX Index, the higher the fear, which, according to market contrarians, is considered a buy signal. Of course, the reverse is also true. The lower the VIX, the lower the fear, which indicates a more complacent market.
According to the rule of 16, if the VIX is trading at 16, then the SPX is estimated to see average daily moves up or down of 1% (because 16/16 = 1). If the VIX is at 24, the daily moves might be around 1.5%, and at 32, the rule of 16 says the SPX might see 2% daily moves.
/VX is the ticker symbol for the CBOE VIX Index Futures. While the cash VIX index is derived from SPX option prices, VIX futures are priced by the marketplaces anticipation of the 30-day market volatility.
What is a good VIX number?
A VIX level above 20 is typically considered “high.” A VIX below 12 is typically considered “low.” Anything in between 12 and 20 is considered “normal.”
Generally speaking, if the VIX index is at 12 or lower, the market is considered to be in a period of low volatility. On the other hand, abnormally high volatility is often seen as anything that is above 20. When you see the VIX above 30, that's sometimes viewed as an indication that markets are very unsettled.
VIX (CBOE Volatility Index) can theoretically reach any value from zero to positive infinite. It can not be negative, but there it no theoretical limit on the upside. VIX can definitely go over 100.
- 2020 - On March 16, the VIX closed at 82.69, the highest level since its inception in 1990.
- 2021 - The U.S. Securities and Exchange Commission fined the S&P Dow Jones Indices for halting data on February 5, 2018.
It also cannot move to zero and historically has not gone below nine, which is distinct from equity prices. VIX futures and options should not be used as long-term, buy-and-hold investments.
One such example takes a VIX level below 12 to be “low,” a level above 20 to be “high,” and a level in between to be “normal.” Exhibit 2 illustrates the historical distribution of S&P 500 price changes over 30-day periods after a low VIX, after a high VIX, and after a normal VIX.
Traders use this to hedge their existing S&P 500 positions. If you're worried that your long S&P 500 position will incur a loss due to a short-term pullback, you could buy the VIX – then, if the VIX spikes as the S&P falls, your volatility index trade will offset the loss from your existing position.
If the VIX is trading at 16, then one-third of the time, the market expects the S&P 500 Index (SPX) to trade up or down by more than 1% (because 16/16=1). A VIX at 32 suggests a move of more than 2% a third of the time, and so on.
Recessionary periods are characterized by a combination of high levels of the VIX index and a flat yield curve. This relationship is robust and has repeated itself through all business cycles for which VIX index data are available.
ProShares Ultra VIX Short-Term Futures ETF (UVXY) has a higher volatility of 19.38% compared to iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) at 13.60%. This indicates that UVXY's price experiences larger fluctuations and is considered to be riskier than VXX based on this measure.
What is difference between VIX and VXX?
VXX is an exchange-traded note (ETN) based on VIX futures. Because these futures need to be rolled to keep VXX alive, this ETN experiences profound time decay via 'contango'. VXX vastly underperforms the VIX for this reason. VIX is an index composed of S&P 500 options so does not, therefore, experience contango.
During low volatility, a trader might sell multiple out-of-the-money options (either calls or puts) while buying a smaller number of options at a closer strike price. This strategy can generate premiums while still allowing for potential profit if the market makes a larger move.
VIX is a widely followed volatility index constructed from the market prices of out-of-the-money (OTM) puts and calls written on the S&P500. VIX is often referred to as a fear gauge.
However, investors need to realize that the VIX actually has little predictive abilities and is more just a measure of where the market stands on any particular trading day, Scott Wren, senior global equity strategist at the Wells Fargo Investment Institute, said in a note to clients.
If you look at the long term chart of the VIX, it has been normally ranging between 13 and 17. It has gone as low as 9.5 and as high as 60, but these are exceptions. You can use the median range chart of VIX to trade on mean reversion. Lastly, VIX gives you the short term range to trade.
