VXN Index Volatility Forecast (10/05/2011)

The VXN Index was expected to surge and achieve the 19% – 20% level and effectively so it was. The implied volatility of the Nasdaq Index was at 18.1% on Monday 18.5% on Thursday but 19.2% was the closing price registered the last Friday.

The volatility is now 6.8% – 7% (23.5% – 24.2% monthly) but the TGARCH curve is still downward sloping implying that the mean reverting process is not over yet and that a decreasing volatility should be expected in the upcoming days.

Furthermore, the augment in market fluctuations has been clearly caused by the poor performance of equity indices but the right hand part of the plot is transparently highlighting that the down move of the underlying market is now over and. As a consequence, the implied volatility of the Nasdaq Index will plummet and settle around its equilibrium point which is around the 4% – 4.5% threshold (13.8% – 15.5% monthly).

The HyperVolatility team is bearish on the VXN Index because the implied volatility of Nasdaq options will decrease over the upcoming trading days and retest the 17% – 17.5% and such a phenomenon would favour a recovery of the underlying market price.

Additionally, once the conditional variance will have achieved its balance point it would not be surprising to have a sideways movement of the volatility around this level.

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