Volatility Index Challenges


Simpler Trading Team

Jan 20th 2022  .  2 min read

“The sky is falling,” “No, look, a rally to new highs”… this market has traders suffering from whiplash because of the sudden reversals in direction.

How do you find trades in this back-and-forth uncertainty?

Consider embracing the volatility.

The VIX (Chicago Board Options Exchange Volatility Index) tracks the implied volatility of the S&P 500 using options prices. This provides an assessment of the likelihood of changes in a stock price and can be used to project future moves, as well as supply and demand. It is often used to price options contracts with high implied volatility resulting in options with higher premiums.

The index is more commonly known by its ticker symbol and is often referred to simply as “the VIX.” Simpler’s traders consider the VIX an indicator of fear in the market. Volatility in a stock price is one way to gauge market sentiment, or fear, among market participants.

Too often traders will make trading decisions based on the news or media hype. This only benefits the media companies, not the trader. Simpler’s traders remain focused on the charts and the signals that they provide, including the VIX.

Assessing fear in the market using the VIX allows Simpler’s traders to develop a sense of movement in the indexes. This includes focusing on trend, structure, and momentum, and helps Simpler’s traders delve into the indexes to find potential trades.

Looking at trends and structure with some insight from the VIX and weekly charts can give traders a better perspective of movement during harsh market conditions – like the past few days.

There will always be cries of the sky falling and over-positive pundits circling around the market.  When traders keep their focus on the charts, the VIX helps tell the rational story of movement in the market.