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VXN Index Volatility Forecast (24/04/2011)

The great drop that pushed the Nasdaq Index down the last Monday did not really affect its implied volatility Index whose fluctuations continued to decrease constantly over the last days. In fact, the VXN opened at 18.4%dropped to 16.4% and closed at 15.8% on Thursday.

The actual volatility is 4.1% (14.2% monthly) and the slope of the curve is clearly signalling that the conditional variance of the VXN Index has now touched the bottom and that it will probably remain stable over the next trading days.

On the other hand, the VXN Index has touched its lowest level since the beginning of the 2010 and the TGARCH curve visibly displays a mean reverting process that has now arrived to an end and that could be followed by an apparent period of calm before exploding again.

Furthermore, we expect a period of relative low conditional variance which should favour the underlying market and make the implied volatility eventually even cheaper than it is. However, in the medium term we are expecting an ulterior and powerful rise of the VXN Index which could push down the underlying and make quite profitable a long volatility strategy.

The HyperVolatility team remains moderately bearish on the VXN Index and we believe that the market will fluctuate between 14% and 15.5% over the next trading days before eventually dropping into the 13.8% zone, news permitting.

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