High volatility associates many traders with an opportunity to make quick money, but for an investor it can be devastating for their portfolio! Although it is on average about 10 trading days per year that this opportunity is given, it is difficult to pick these on average 10 days per year to make quick money if you do not have a daily look at the VIX index. There is also a very high risk of catching falling knives these days and increasing the loss.
What is VIX and how to interpret it?
VIX stands for Volatility Index and is the symbol for the Chicago Board of Options Exchange Volatility Index. It reflects the real-time prices of the options that go against the S&P 500 index and is the most well-known volatility index in the markets. It works in such a way that investors can protect their investments in the S&P 500 by buying a put option in their investments if the stock market suddenly falls. If many investors suspect large fluctuations in the next 30 days, there will be a rush for options and then the option index VIX will rise. This rush is creating concern in the market and therefore VIX is also called the "fear index".
Usually it is said that there are 3 levels to look at:
1. The average is around 20 or just below, namely 19.38 on average. When the stock market is very calm, it is usually just over 10-11.
2. Increased volatility is at 30. It is normal for the stock market to reach those levels without having to worry about a stock market crash every time it reaches 30 or just above. The increased levels are usually at or above 30 for a couple of days before it then drops to the average.
3. If VIX reaches 40 or more, we have concerns in the market and it may be wise to review your investments and protect them.
Unlike the linear levels 20, 30 and 40, I have created an indicator that I also use for all stocks I look at. It measures expected price ranges over a period of time. Therefore, there may be warnings even though VIX is around or below 20. In this way, I see warnings earlier than these static levels.
The gray zone is the most anticipated area where all courses spend most of the time. For VIX, it is about 94.42% of the time within this zone. In other words, I can assume that in 9 cases out of 10 it is a false alarm.
1. The black line shows the average level for both price and time and for VIX you can use it to buy stocks when it has closed at least 2 days below the black line.
2. If you have covered your positions when a warning has been issued, you get 1 chance out of 10 that it hits the "roof" or near the roof in the red zone (a stock market crash has occurred), this is usually where the fear has its peak and most likely you have bought the bottom of a stock that you want to invest in, for this time.
If I am to look ahead, greater unrest in the market tends to occur when the 14 ° and 7 ° line is broken, drawn from the last peak. If you look at the average for VIX, which is around 19.38 and looking ahead in time, this line will cross 19.38 on November 21, 2021, which I have set as a preliminary date as a starting point for increased concern in the market. Another potential warning is also set for July 12, 2021. It may be wiser to protect your positions in advance than to do so in the midst of an ongoing market turmoil. Considering the elections in the USA this autumn, we can get up to the 14 ° line and above, which will mean extreme concern in the markets around the world as the levels will be between 50-60. So it can be extra important to keep an eye on the warnings during this period.
As usual, these are my own ideas and thoughts about mainly the indicator I described above, and you should do your own analysis before investing your money. Good luck with your investments!