The weekly 14-period average true range (ATR) – a volatility indicator – for the FTSE 100 peaked around 280 in early 2016, while the DAX peaked around 600 at a similar time. However, they also provide a good example of two markets that typically exhibit a significantly different amount of volatility, which outstrips the differentials in terms of index pricing. In terms of index pricing, the FTSE 100 is around 55% smaller than the DAX. This accounts for much of the reason why even within the UK, the DAX is often a more popular market for traders than the FTSE 100. Which is in comparison to the S&P 500, currently around 2500. Given the relative value of each market, it makes sense that traders will see substantially larger movement in terms of points or ticks for the Dow - currently around 23,000. The DowĪ perfect example of this is the Dow Jones, compared with the S&P 500. Some markets inherently exhibit higher average daily movements when measured in pips, while others will generally move few points in a day. There are a number of ways to search for volatility within financial markets. A flat or inverted yield curve signifies an environment where traders are somewhat fearful for the future, if not the immediate picture. This gives us a good opportunity to study the types of reasons why the VIX might exhibit a sharp, sustained rise.įirstly, we have been seeing growing fears over the future economic stability of the US, as exhibited by an inversion of the yield curve. However, at the turn of 2019, the VIX started to show greater sharp gains. Given the economic strength seen throughout much of US President Donald Trump’s presidency, it comes as no surprise to see the initial fears gradually fade away after he took office. Trading the VIX is largely going to centred around your perception of forthcoming economic and/or political instability. Secondly you can seek out volatility within everyday markets, with traders seeking to trade those fast moving and high yielding market moves. Firstly, you can trade a volatility product such as the VIX. There are two ways of trading volatility. Remember that historically speaking, we have only ever seen the VIX reach particularly elevated levels when there are economic issues such as the 2008 financial crisis. Historically, many have labelled the VIX as the ‘fear index’, with heightened levels of expected volatility indicative of a market mentality that sees trouble ahead. Specifically, the prices used to calculate VIX values are midpoints of real-time SPX option bid/ask price quotations’.Įssentially, traders who speculate using the VIX will be taking an opinion on the expected volatility in the US stock market. The most popular volatility market is the Volatility Index (VIX), which is an index compiled by Chicago Board Options Exchange (CBOE) to reflect the expected volatility in the US S&P 500 market.Īccording to CBOE themselves, ‘the VIX estimates expected volatility by aggregating the weighted prices of the S&P 500 (SPXSM) puts and calls over a wide range of strike prices. Volatility trading is quite unlike most forms of trading, with the market representing a derivative of another market, rather than a market itself.
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