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VIX Index Volatility Forecast (15/05/2011)

The VIX Index experienced some ups and downs throughout the entire week. Specifically, the market opened at 17.1%dropped to 16.9% but it then closed to 17% on Friday.

The current volatility is around 5.8% – 6% (20% – 20.7% monthly) and the TGARCH plot is showing a fairly stable curve which should mean revert during the upcoming days.

The volatility curve has been trading within a very narrow range for a very long period of time and it is reasonable to expect that the conditional variance will head north once again during the next days and perhaps achieve 8% (27.7% monthly).

The HyperVolatility team remains bullish on the VIX because the implied volatility Index is still trading in the lowest level of its last quartile: how long is this going to last?

The sideways movement has been caused primarily by the great instability that hit commodity markets and this phenomenon will provoke a side effect in equity indices which are probably going to head south even this week.

Nevertheless, before entering any position in the underlying market we will be waiting for the VIX to provide a clear signal that something has changed.

We will play very defensively this week because there is a great deal of uncertainty surrounding both equity and commodity markets.

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