At Volatility Trading Strategies it’s no surprise that we do tend to talk a fair bit about volatility, and the VIX index is a part of that discussion.  It’s not the be all and end all, but at the right time it is a useful tool in our overall analysis of market volatility.

 

For those unfamiliar, the VIX index is the Chicago Board Options Exchange  (CBOE)  volatility index which is a representation of the markets forward 30-day implied volatility.

 

It’s not really an index in the traditional sense though.  Most indexes, take the S&P 500 for example is a representation of the market capitalizations of the 500 component companies.  It’s investable, you can own the S&P 500 index.

 

The VIX index though is more of a snap shot in time statistical measure of the implied volatility of an array of put and call options on the S&P 500.  Not market cap or price, but option activity on the S&P 500 and as such it is not investable, meaning you can’t directly own the VIX.  It’s just a statistic.

 

Something that I find people are often times not aware of though is that there are VIX style indexes for different time frames.  So here’s 3 of them that I use literally every single day in my analysis of the markets:

 

VXST:  9-day forward implied volatility index.  On a 3 month chart you can see the 30-day VIX  (red)  tends to be significantly higher than the 9-day VXST  (green).  But if volatility rises quickly, the VXST can actually overtake the VIX.  This can be a valuable cross over signal when used correctly.


VIX3M:  3 month forward implied volatility index.  Bear in mind, this was called the VXV since it launched.  The CBOE only recently changed it’s name to VIX3M.  Again in a 3 month chart you can see the 30-day VIX  (red)  is usually lower than the 93-day VXV  (blue)  but there can be choke points and crossovers to be on the lookout for.


VXMT:  6 month forward implied volatility index.  Not surprisingly here as well, the longer dated 6 month VXMT  (purple)  tends to be significantly higher than the 30-day VIX  (red).  Remember investors need to be compensated for future unknown volatility, and 6 months out a lot of variance is possible.


So the relationship between VXST, VIX, VIX3M, and VXMT can be an invaluable tool for both investors of volatility products as well as option trading.  Of course it is just a small part of the big picture, but like I said I use them every single day in all my trade decisions.

Do you know the last time the VIX crossed over the VXMT?  To be continued…

 

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