VXN Index Volatility Forecast (08/08/2011)

The massive drop in all equity indices clearly did not leave the Nasdaq untouched and consequently its implied volatility. The VXN Index opened at 24.2% on Monday, rose to 25.7% on Tuesday, dropped to 24.7% on Wednesday, jumped to 31.6% on Thursday and closed at 33.7% on Friday.

The actual volatility is 11% (38.1% monthly) and the TGARCH plot is displaying a volatility curve which has now touched one of the highest points ever achieved by the VXN Index since the beginning of the 2010.

Moreover, it is important to point out that the very last part of the curve is extremely steep and there are no any signs of weakness implying that the next trading days could see even wider fluctuations of the implied volatility.

The implied volatility of Nasdaq Index will probably keep rising over the next trading hours because many investors will keep buying options in order to protect their stock portfolios and that’s why we think that a mean reverting movement towards the 4% level (13.8% monthly) is an eventuality more likely to occur the next week.

The HyperVolatility team is bullish the VXN Index because the volatility curve is still upward sloping and investors’ fear is pretty high.

The VXN Index should eventually retest the 38% – 40% area by Friday but the most volatile days will be probably concentrated in the first half of the week.

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