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What is volatility index?

Published by Ali Muhammad
Updated on

Volatility index refers to an index that indicates volatility of stocks (S&P 500). The range of VIX or Volatility index is from 0 to 100. VIX value directly relates to the market conditions. CBOE (Chicago Board Options Exchange) developed VIX for indication of Volatility in S&P 500.

  • A Higher value closer to 100 means high Volatility in the market
  • A lower value closer to 0 means low Volatility in the market
Volatility index

Volatility index is famous because of its relation with S&P index. This characteristic of Volatility index makes it easy to do technical analysis. Because before investing in stocks, look for volatility indicator and then decide.

Market sentiments and risk factors are calculated by VIX. Because a good investor will always measure risk factor before making any investment decisions. So VIX helps a lot in measuring upcoming risks.
When its value is greater than 30 then there is fear in the market, more risks investing in S&P 500 stocks. On the other hand, if value is lower than 30 then S&P 500 is considered to be safe for investments. That’s why, VIX helps traders to take decisions.

Volatility index strategy

There is inverse relationship between Volatility index or VIX and the stocks. When stock market is safe and has lower risks and bullish trend, then its value will be low and is in bearish trend. On the other hand, if its value spikes upward and is in bullish trend, then there is more fear in the stock market and stock market direction will be bearish because of more risks.

It can be used to hedge the funds with S&P 600 index. For example, if you are in long position in S&P index then you can hedge position in volatility index If value is greater than 30 then we will avoid investing in stocks because of fear in the market that can cause a sudden drop in prices of stocks. If price is below 30 then it is safe to invest in stocks.

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Note: All the viewpoints here are according to the rules of technical analysis and for educational purposes only. we are not responsible for any type of loss in forex trading.

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