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VIX Index Volatility Forecast (14/03/2011)

The VIX Index is clearly downward sloping but, as we previously said for the VXN Index, a further drop, with the macro environment in this situation, would not seem to be the most probable outcome for this week.

The volatility is now 8% (27.7% in annual terms) but we believe that a further fall of the underlying market would inevitably push the volatility of the VIX Index towards 10% (34% annualised).

The strategy we are going to adopt is very similar to the one mentioned for the VXN Index: we will wait for a clear signal before placing any trades and if the volatility is not going to rise we will try to find extra returns from other markets.

However, should the volatility of the VIX rise and should the VIX retest the 21.5% – 22% area we will short the underlying and buy put options.

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