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When the VIX moves below the MA 10 , which is the middle line of the Bollinger Bands, it is highly probable that will move further down. No Indication. In that case, avoid entering market orders and prefer to use a limit orders.

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Contact us today and learn more about our free IB program, it is free as we never get paid by traders Menu Contact Us. CT and p. Only those SPX options are considered whose expiry period lies within 23 days and 37 days. While the formula is mathematically complex, theoretically it works as follows. All such qualifying options should have valid non-zero bid and ask prices that represent the market perception of which options' strike prices will be hit by the underlying stocks during the remaining time to expiry.

As the derivatives markets matured, ten years later in , Cboe teamed up with Goldman Sachs and updated the methodology to calculate VIX differently. They then adopted methodology that continues to remain in effect and is also used for calculating various other variants of volatility index. Volatility value, investors' fear and the VIX index values move up when the market is falling.

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The reverse is true when market advances—the index values, fear and volatility decline. One should also note that VIX movement is much more than that observed in the index. VIX values below 20 generally correspond to stable, stress-free periods in the markets. VIX index has paved the way for using volatility as a tradable asset, although through derivative products. Active traders, large institutional investors and hedge fund managers use the VIX-linked securities for portfolio diversification , as historical data demonstrates a strong negative correlation of volatility to the stock market returns — that is, when stock returns go down, volatility rises and vice versa.

Other than the standard VIX index, Cboe also offers several other variants for measuring broad market volatility. Like all indexes, one cannot buy the VIX directly. Active traders who employ their own trading strategies as well as advanced algorithms use VIX values to price the derivatives which are based on high beta stocks. Beta represents how much a particular stock price can move with respect to the move in broader market index. Traders making bets through options of such high beta stocks utilize the VIX volatility values in appropriate proportion to correctly price their option trades.

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Vix is the fear index

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Personal Finance. Your Practice. We know that whenever the VIX index is declining and registering lower readings, that the market will tend to be in a lower volatility environment, with a steady uptrend in place. Alternatively, we know that the VIX index tends to rise or spike with higher readings, whenever the markets are experiencing a high level of uncertainty or fear. As such, we will look to the VIX index reading at both the current level, and historical levels to gauge the current market environment.

Additionally, our strategy will utilize two additional technical indicators that help us time our trades. The two technical studies that we will incorporate within the strategy include the Bollinger band, and the Nine period Simple moving average. The Bollinger band is a volatility based study that will help us to isolate a period within the market wherein a reversal is likely.

As such, we will be using the Bollinger band as a mean reversion indicator within the strategy. Additionally, we will utilize the simple nine period Moving average for honing in on our entries.

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Now it is important to note that this VXX strategy can be employed in both directions. As such, it can be applied as a long or short strategy. This is to say that we are looking to buy VXX when the long conditions are met, and looking to sell VXX when the sell short conditions are met. Below are the conditions for initiating a long position for the strategy using VXX daily chart:. And below are the conditions for initiating a short position for the strategy using VXX daily chart:. Keep in mind, the underlying premise behind our strategy is that volatility has mean reverting characteristics, and as such, we are looking for times when volatility has become overbought or oversold.

This will provide us an opportunity to fade the current extreme volatility reading in expectation for a snap back to more normal levels as seen on a relative basis. It represents the VXX based on daily closing prices. The green outer bands on this price chart represents the upper and lower lines of the Bollinger band.



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The center blue line is the nine period Simple moving average line. If we glance over to the beginning of this price chart, we can see that the price movement started the trend downwards in VXX. This downward price trend lasted for approximately three weeks prior to a touch of the lower Bollinger band. You can find where that actual Bollinger band touch occurred if you refer to the magnified area near the center of the chart. Now that we have confirmed that VXX has been trending lower, and that it has penetrated the lower Bollinger band, we can prepare for a long trade set up in anticipation for volatility to revert back towards its mean.

Since the touch of the lower Bollinger band represents an oversold condition in the context of volatility, we would favor an upside price movement on this VXX chart.



Our actual entry to buy will be triggered when the price crosses above the nine period SMA from below. As is evident from the price chart at the time of the touch of the lower Bollinger band, the nine period SMA was above the current price of VXX. You can see where that event occurred as is referenced by the blue arrow noted as, Entry. Notice how that candle closed above the SMA 9 for the first time following the touch of the lower Bollinger band.

The stop loss would be placed at a recent swing low just below our entry signal. Finally, the take profit target is dependent on the price interacting with the upper line of the Bollinger band.