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VIX Index Volatility Forecast (08/08/2011)

The S&P500 implied volatility index is clearly reflecting, with its high price, the great fear that many investors and traders have about the US economy.     The VIX Index opened at 23.6% on Monday, rose to 24.8% on Tuesday, dropped to 23.3% on Wednesday, jumped to 31.6% on Thursday and closed at 32% on Friday.

The actual volatility is 13% (45% monthly) and the TGARCH plot is displaying an impressively high volatility curve whose slope is dangerously steep.

The volatility of the VIX Index has been increasing over the last 2 weeks and the great explosion in the conditional variance is a clear signal that many investors and traders are now panicking and fearing a double dip recession.

The volatility is very high and it will likely to remain high in the upcoming hours with a great potential for an ulterior explosion: there are no upside boundaries in this market.

The HyperVolatility team is bullish the VIX Index because its volatility is very elevated but there are no signs of weakness or retracement whatsoever meaning that many traders purchased a lot of options in order to protect their portfolios and are likely to keep doing so in the next hours.

At the moment buying VIX calls and going long VIX futures seems to be the only reasonable thing to do.We expect the VIX Index to retest the 40% level by Friday.

2 Responses to VIX Index Volatility Forecast (08/08/2011)

  1. the VIX index is above your 40% mark, and all but the first futures contracts are still below 30%.
    what is your take on the VIX curve? Will the index return to mid 20’s in the next months?

    • We are expecting the volatility and, consequently even the VIX, the get back down to its initial level. Clearly this is going to take some time, perhaps 1 or 2 months, and in between there could be some short term bursts which could make the picture looks less “neat”. The Fed and the ECB will do all they can in order to prevent the markets from crashing as they did in the 2008-2009 period so we do not think that things will get worst. The market was bound to recover and head north 2-3 days ago but the S&P downgrading changed the picture. However, given the panic amongst investors, ulterior bad macroeconomics news would crash all markets around the world pushing the VIX well above the 60% – 70% threshold.

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