VIX Index Volatility Forecast (29/05/2011)

The implied volatility of the S&P500 options market decreased over the last 5 days and the chart clearly displays a situation where the conditional variance keeps trading within a restricted range. During the last week the VIX Index opened at 18.2% plummeted to 17.07% on Wednesday and settled around 15.98% on Friday.

The volatility is now 6% – 6.1% (20.7% – 21.1% monthly) and the curve seems to be, once again, downward sloping and in the middle of a mean reverting process which will probably end once the oscillation rate achieves the equilibrium point set around 4.5% (15.5% monthly).

The volatility should therefore decrease during the next trading days even though we remain quite sceptical about its persistence in the long run because a short term explosion could occur any time.

The HyperVolatility team is bearish the VIX Index and we believe that the 14% – 14.5% threshold could be touched by the next Friday whilst the volatility of the VIX itself should plummet and achieve 5.2% (18% monthly).

Nevertheless, we will constantly monitor the development of the VIX throughout the week as a short term augment of the conditional variance could easily bring the Index back into the 20% area.

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