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VIX Index Volatility Forecast (23/05/2011)

The VIX Index moved almost like the VXN and rather than showing an augmented activity, the last week was merely a lateral one. In particular, the market opened at 18.2% dropped to 16.2% on Wednesday but 17.4% was the closing price registered the last Friday.

The volatility is now 4.1% (14.2% monthly) and the TGARCH plot is showing a curve which is not really far from where we left it one week ago because the sideways movement which hit most equity markets kept the conditional variance extremely low.

The volatility of the VIX is still trading in its last quartile and even if a short term explosion would probably be the most probable scenario to consider it is important to highlight, once again, that the mean reverting process of volatility could take a prolonged period of time before manifesting itself.

The HyperVolatility team remains moderately bullish on the VIX Index because there is a high probability that the variance will augment during the upcoming hours and eventually achieve the 6% – 6.5% level (20.7% – 22.5% monthly) whilst the market should achieve the 19.5% – 20% area by the end of the week.

Nevertheless, we will constantly monitor the situation before attempting any trade in the underlying or in the options market and we will wait for a clear and quantifiable movement of the conditional variance.

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