VIX Index Volatility Forecast (22/08/2011)

The volatility decreased in the first half of the week, as we managed to forecast, but the bad macroeconomics data accompanied by some nonsensical rants pushed the fear index through the roof. In fact, the VIX Index opened at 31.87% on Monday, rose to 32.85% on Tuesday, settled at 31.58% on Wednesday, jumped to 42.67% on Thursday and closed at 43.05% on Friday.

The actual volatility is 17% (58.8% monthly) and the TGARCH plot is showing an upward sloping curve implying that the panic in the market is far from being over and that the next trading days are likely to experience even wilder market oscillations. Additionally, the contemporary volatility readings are higher than the ones observed during the big drop that the market experienced in March 2004. Also, the VIX Index climbed so high only in the middle of the credit crunch: rough waters ahead!!

Panic and fears are still the predominant feelings amongst investors and the fact that the VIX closed 2days in a row above the 40% threshold is more than a word of warning (again, such a phenomenon did not occur since the first phase of the credit crunch).

The HyperVolatility team is bullish the VIX Index because many traders and investors will keep buying downside protection in the options market driving the index up. In particular, we are expecting the VIX to reach the 50% level by Friday.

On the other hand, good macroeconomics news could push the implied volatility index down towards the 30% level but it’s difficult that we will see readings below this level because most of the market participants will wait for Bernanke’s speech on Friday before making up their minds.

Leave a Reply

Your email address will not be published. Required fields are marked *

Go back to top