The value of VIX increases when the market declines and decreases when the market rises,as the rising stock market is viewed as less risky, and a declining stock market more risky.
The higher the perceived risk is in stocks, the higher the implied volatility and the more expensive the associated options, especially puts,Hence, implied volatility is not about the size of the price swings, but rather the implied risk associated with the stock market. When market declines, the demand for puts usually increases & Increased demand means higher put prices & higher implied volatilities.
Comparing VIX action with that of the market can yield good clues on future direction or duration of a move. The further VIX increases in value, the more panic there is in the market. The further VIX decreases in value, the more complacency there is in the market.
Extremely low VIX readings indicate a high degree of complacency, and are generally regarded as BEARISH, readings below 20 as excessively bearish.
Conversely extremely high VIX readings indicate a high degree of panic among options traders, and are regarded at BULLISH.
High VIX readings usually occur after an extended or sharp decline and sentiment is still quite bearish? & readings above 30 as bullish.
Conflicting signals between VIX and the market can also yield sentiment clues for the short term. Overly bullish sentiment or complacency is regarded as bearish On the other hand, overly bearish sentiment or panic is regarded as bullish.
If the market declines sharply and VIX remains unchanged or decreases in value (towards complacency),( like on 25th may ) it could indicate that the decline has further to go.
Contrarians might take the view that there is still not enough bearishness or panic in the market to warrant a bottom. If the market advances sharply and VIX increases in value (towards panic), it could indicate that the advance has further to go. Contrarians might take the view that there is not enough bullishness or complacency to warrant a top.
Courtesy to stock chart.com
The value of VIX increases when the market declines and decreases when the market rises,as the rising stock market is viewed as less risky, and a declining stock market more risky.
The higher the perceived risk is in stocks, the higher the implied volatility and the more expensive the associated options, especially puts,Hence, implied volatility is not about the size of the price swings, but rather the implied risk associated with the stock market. When market declines, the demand for puts usually increases & Increased demand means higher put prices & higher implied volatilities.
Comparing VIX action with that of the market can yield good clues on future direction or duration of a move. The further VIX increases in value, the more panic there is in the market. The further VIX decreases in value, the more complacency there is in the market.
Extremely low VIX readings indicate a high degree of complacency, and are generally regarded as BEARISH, readings below 20 as excessively bearish.
Conversely extremely high VIX readings indicate a high degree of panic among options traders, and are regarded at BULLISH.
High VIX readings usually occur after an extended or sharp decline and sentiment is still quite bearish? & readings above 30 as bullish.
Conflicting signals between VIX and the market can also yield sentiment clues for the short term. Overly bullish sentiment or complacency is regarded as bearish On the other hand, overly bearish sentiment or panic is regarded as bullish.
If the market declines sharply and VIX remains unchanged or decreases in value (towards complacency),( like on 25th may ) it could indicate that the decline has further to go.
Contrarians might take the view that there is still not enough bearishness or panic in the market to warrant a bottom. If the market advances sharply and VIX increases in value (towards panic), it could indicate that the advance has further to go. Contrarians might take the view that there is not enough bullishness or complacency to warrant a top.
Courtesy to stock chart.com
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