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VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period.
A high implied volatility means a high price for options. When the market is believed as likely to soar as to plummet, writing any option that will cost the writer in the event of a sudden large move in either direction may look equally risky. Hence high VIX readings mean investors see significant risk that the market will move sharply, whether downward or upward. The highest VIX readings occur when investors anticipate that huge moves in either direction are likely. Only when investors perceive neither significant downside risk nor significant upside potential will the VIX be low.
The VIX is referred to as the "fear index", and high VIX is perceived as bearish for stocks since usually high volatility is associated with a bearish market. Also, there is a general perception that options are used more to protect downside of stock portfolios than to 'bet' on the upside, and therefore higher cost for options means bearish expectations.
The VIX tends to be mean reverting. A possible trading strategy is to fade its extremes; when the VIX penetrates its high Bollinger band sell the S&P 500 (or another broad US stock index), when it penetrates the lower Bollinger band buy the index.
The strategy in this object enters a trade at the close of a day when the VIX penetrates its 20 day, 2 standard deviations Bollinger Band, and closes the position when the VIX reverts to its 20 day mean. This could be used as a starting point for further system development and refining.
For VIX daily data you can use the Yahoo downloader with the symbol ^VIX.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
