Fear
and greed are the most important factors in the market. When the markets are
going up, traders tend to be greedy and buy more with the hopes that the upward
trend will continue. When the price of an asset is moving lower, traders tend
to short, with the hopes that the price will continue declining. Fear on the
other hand leads to many investors to exit their trades. It is because of these
reasons that you see large spikes whenever a major news crosses the wires. For
example, if there is a crisis in the Middle East, the price of crude tends to
spike, even when the investors don’t know for sure whether this will affect the
supply of the commodity.
The
challenge for investors is on how to predict the future uncertainties. One of
the most popular ways to do it is the use of the VIX index. The VIX, also known
as the fear index, is one of the most followed financial derivative in the
market. The index was designed by Robert Whaley in 1992 under the authorization
of the Chicago Board of Options Exchange (CBOE). The index was then tweaked in
early 2000s.
The
inputs of the index are the call and put options on the S&P 500 for the
near-term options with more than 23-days of expiration. The next-term options
have less than 37 days if expiration. It also takes input from the risk-free US
treasury bill interest rates. The goal of the VIX is to predict the implied
volatility of the S&P 500 in the next 30 days. Call option is an option to
buy a security at an agreed price on or before a particular date. The put
option is the opposite of call and is the option to sell at a future date.
In
the past two weeks, the VIX index rose sharply after Donald Trump added tariffs
to Chinese goods. This week, it rose after China announced retaliatory tariffs.
In the past few days, the index has eased a bit as the trade fears ease. This
is because investors expect Donald Trump and Xi Jinping talks to be productive
in Japan at the G20 summit.
On
the chart below, the VIX index has declined below the 45-day and 25-day moving
averages. At the same time, the RSI has dropped from a high of above 77 and
declined to the oversold level of 30. In the short term, the pair will likely
continue moving lower to the low of 15.
The post Why the VIX Index Could Decline to Below $15 appeared first on Forex.Info.