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.  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 natural longer term state is a VXMT > VIX.


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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