VIX Discoveries: A Key Indicator for Reading Market Sentiment
VIX Discoveries: A Key Indicator for Reading Market Sentiment
This is the TradingFlow Team, and this article will introduce VIX discoveries.
What is VIX?
The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500 Index call and put options. The VIX rises when there is uncertainty or fear in the markets, as investors anticipate higher volatility, and it tends to fall when market conditions are stable or bullish. Therefore, we can see from this 1-month VIX chart, that VIX remains high from September 4th to September 11th 2024.
VIX and U.S. Stock Market
As a volatility index, the VIX is inversely correlated with major stock indices such as the S&P 500 and the Nasdaq Composite Index. This inverse relationship exists because rising volatility often accompanies periods of market decline, as investors become more cautious and uncertain about future market conditions. In contrast, during periods of optimism and market growth, volatility tends to be lower, and the VIX declines. The chart above demonstrates this inverse relationship – when SPY and Nasdaq rise, VIX fall. According to its special feature, it is often considered as a good choice to hedge with U.S. stock market in a compositive portfolio.
Market Sentiment
The correlation between the S&P 500 and the Nasdaq with the VIX provides valuable insights into market sentiment. When both indices are trending upward, the VIX usually declines, signaling confidence among investors. Conversely, when the VIX spikes, it indicates rising fear and uncertainty, often preceding significant drops in the S&P 500 and Nasdaq. Understanding this relationship is crucial for traders and investors who use the VIX as a tool to hedge against market volatility or as an indicator for potential market movements.
According to Trading Flow’s data in Contract Developer Section under Historical Option Trades, we can see on September 6th 2024, VIX had Premium high as $8.75 million, and Average of Implied Volatility was up to 259.66%. This leads to the high percentage of transactions completed on the Bid side of 47.74%, indicating investors were eager to “buy to open” VIX and its rising price and market sentiment was reaching resistance level such that VIX price was high enough. However, looking at SPY that had Net Delta Exposure of -906.08 thousands with a negative market sentiment, the total value of SPY portfolio in the market was positioned to benefit if the underlying asset's (S&P 500) price decreases. There was a clear contrast between VIX high price and SPY negative market sentiment.
Delving deeper into this, let us go to the OI Change Rank under Option Chain Analysis Section in Trading Flow, by selecting the symbol for VIX and ranking the OI DEX that is the OI change by Delta Exposure, the strike price on September 6th 2024 remained high, and there was even on strike price up to $35 with 1,766 volume. Looking at Contract Level Developer by filling in symbol as SPY, expiration date as 2024-09-06, and strike price as 541 for put options, we could see the sharp increase of OI on September 24th. The same day, Nasdaq dropped 2.89%, having a positive correlation with SPY.
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Disclaimer: This article is for informational purposes only and does not constitute investment advice. Before making any financial investment decisions, please ensure you thoroughly understand all aspects of the information and conduct your own research.
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