Our Favourite Volatility Indexes & How To Use Them
There are actually quite a few volatility indexes, here are just some of the ones that you’ve seen us use...
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We have a quick question from Gurmant and Ayman, both asking about the various volatility indexes that we use and how we use them.
Thanks for the question guys, there are actually quite a few volatility indexes, some of the ones that you’ve seen us use is:
OVX – which is oil’s volatility index.
GVZ – which is gold’s volatility index.
VIX – which you know is the S&P’s vol index.
VXN – which is the volatility index for the Nasdaq.
MOVE – which is the volatility index for treasuries.
There are volatility indexes for most of the major markets, for things like FX we of course use things like implied vols and risk reversals but even for that you can use something like EVZ which is the vol index for the Euro.
If you have access to something like Tradingview or Eikon you will be able to track so many volatility indexes, I’m actually busy building out an Eikon Monitor just for tracking volatility across the major asset classes.
What’s important about these volatility indexes is that they track the implied volatility for their relevant assets and not the realized volatility. They are tracking the implied moves in these assets, which tells us a whole deal about the uncertainty that the markets are pricing into that particular assets.
Now the important thing about volatility, is that it can be either rising or falling, trending or non-trending. The best environment for any asset is when you have falling trending vol, and the worst environment for any asset is when you have rising trending vol. Thus, there is usually an inverse correlation between an asset and it’s volatility, as the volatility moves higher that is indicative of rising uncertainty which is bad for the asset and falling volatility means less uncertainty which is good for the asset.
What can sometimes catch market participants out in the short-term is when you have more temporary reactions in volatility, where you have a violent massive spike in something like the VIX but it’s not necessarily a trending move it’s more short-term, like we had this week. These moves can create a lot of violent swing like we saw this week due to the increased volatility in the market.
A good example of how dangerous this was is yesterday’s session, where the prior day’s spike in VOL saw many participants trying to chase risk assets lower and they were left holding a big bag of you know what yesterday because the tried to chase the VOL spike instead of looking at the move in the bigger context, which is why we explained yesterday at the start of the session before the move higher in risk assets started that we are cautious and in terms of the bigger picture don’t have appetite to chase those moves lower.
So, to show you how I practically used this in today’s session we can look at Gold. Right now, I’m holding a short to med-term downside bias in Gold, which we’ve explained in the videos over the past few weeks, and that is mostly driven on real yields and the markets expectations for curves at the back end of the curve to steepen, which means a move higher in US10Y, which should put upwards pressure on real yields, which is of course one of the biggest drivers for Gold prices.
So, in today’s session, gold has been somewhat supported by a weaker Dollar, however the US10Y has been ripping to the upside while Gold has been making some solid gains and moving back into an interesting area of resistance at around 1860.
So, when I sold Gold earlier this week close to 1860 with the Dollar and US10Y in mind, I closed out the position when GVZ opened up after the cash open because it was breaking and trending lower, and that remember is indicative of less uncertainty and possible upside in price, so I closed it at breakeven.
However, today, things are a lot more interesting. Even though Gold is supported by a weaker Dollar, the move in US10Y should pressure Gold, and more importantly from a trigger point of view, we’ve had GVZ pushing to the upside breaking higher for the second session in a row. So, for me, that was a clear entry trigger for Gold and I got short at 1861 as we broke back down into this recent range.
So, hope that helps on how I use these indexes guys, any other questions don’t hesitate to let me know.
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