What are the volatility indexes?

Swing Trading . Stock And Option Trading.

The Volatility indexes are used to measure the volatility in the market. They measure implied volatility in both calls and puts. They are used to determine future stock movements of stock as well as determine if stock options are overvalued.

The first of the Volatility indexes was the VIX. It was introduced in 1993 to measure the Volatility in the SPY. Other similar indexes came after the VIX. The VXN tracks the Nadaq, and the VXD tracks the Dow Jones. These newer indexes are not used as frequently as the VIX. Most traders look at the VIX as the best predictor of market volatility.

The VIX can be used to predict market conditions. Because bear markets are more volatile than bull markets the VIX is higher during down trend. On the other side it is lower when there is an overall uptrend. This is what leads to the famous saying “If the VIX is high it’s time to buy, If the VIX is low it’s time to go”.

The VIX also has an effect on option process. Because option prices are based upon the value of the stock and volatility they are more expensive when Volatility is high. During periods of low Volatility Option buyers are favored. During periods of high Volatility option sellers are favored.

The VIX is option able but it is not recommended for trading. You are taking big risks when playing the VIX. Sudden evens can make the VIX spike up without much warning.

These indexes are used as secondary market indicators under the SPY,NASDAQ, and DOW JONES.

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