Using VIX As a Fear Gauge in Binary Options

By | September 22, 2013

Monday, September 23rd, 2013 by James Franklen 

Binary Options Analysis

A binary options trader must not remain oblivious to factors that affect the price of underlying assets of binary options contracts. By performing technical and fundamental analysis rigorously, traders try to anticipate the affects of various factors on the price of the option. This analysis aims at factors such as demand, supply, politics, trends, or sentiments.

Often market sentiments were accorded minimum or residual attention. That went for traders in stocks, futures, options and binary options. The main reason behind this was the fact that a solid barometer that could be used to deduce how the sentiments were, remained absent. It involved subjectivity and traders perceived market sentiments in their own ways and deduced direction of sentiment in the like manner.

investorfear

VIX and Binary Options 

While trading binary options, grasping sentiments correctly and quickly means a quick profit. Generally, the realization that market sentiment is one the most important variable to be analyzed in financial trading also rose. In early 1990s VIX, volatility index of Chicago Board of Options Exchange was introduced. Right after its introduction, VIX became the yardstick of market volatility measurement. Due to its acceptability as the volatility yardstick, VIX is referred to as ‘investor fear gauge’.

VIX essentially translates the stock index option prices to measure market’s anticipation for near term volatility. It quantifies volatility expectation on contracts ending near term. Therefore, it represents volatility of an option due to expiry in exactly 30 days. As it is based on real-time prices of options, it echoes the investors’ expectation of future expected volatility in stock market.

The older version of VIX was measured as weighted implied volatility of 8 S&P 100 at-the-money call and put options. The latest approach of VIX calculation includes the broader index, that is, S&P 500. This broader inclusion of options from the index allows for a more precise outlook of investor’s expectations.

Interpretation for Binary Help

The values generated through VIX are percentages. A value of 14 or 14% means that market expects the index to move 14% up or down annually or 1.17% over the coming 30 days. Values above 30 are considered as high volatility and value below 20 are considered as low volatility. High volatility means uncertainty and fear, while low volatility means relaxation or complacency. The correlation between VIX and S&P 500 is negative. If the VIX climbs, chances are that the S&P 500 will fall. If the VIX falls, chances are that S&P 500 will rise.

If a trader is trading indices, with the help of VIX, he can predict market movement with the help of this fear gauge. With the help of VIX movements, binary option trader in indices can give sentiments a value. If the VIX is going up, it means that market is expecting significant volatility in next 30 days, and there exists a greater chance that the index will move erratically downwards.

Using such deductions with input from other tools such as triangles, pivots, breakout or ranging; trader can set profitable trades in the said direction.

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