Volatility + VIX = Predictable Risk

Last week traders noticed the S&P 500 Futures rally but risk measures like the VIX were not selling off.

Cory K purchased SPY puts to hedge the increased chance of a market sell-off and was now protected when the stock market sold off toward the end of last week.

It’s common for traders to follow the VIX, a 30-day measure of volatility. Traders can also follow different timeframes of the VIX, including the short-term 9-day, all the way out to a longer-term 365-day volatility measure.

Below is a chart comparing the VIX9D and the S&P 500 Futures.

1. Notice the range the /ES Futures were stuck in between 05/30 and 06/06?  The VIX9D wouldn’t get below that 23 level.  For the market to rally higher, the VIX9D needs to continue to follow through and trade lower to the downside.
   
   
2. The short-term VIX9D leads the way, slowly creeping higher while the purple line slowly trades lower.  Then the short-term volatility spike and huge market sell-off.
   
   
3. VIX9D weakens first, /ES Futures rally second.

Now we can overlap different timeframes of this risk measure.

The goal is to figure out where the uncertainty is – for instance, right after the pandemic started in 2020, the shorter-term risk was way greater than the long-term because we were entering the unknown.

Markets expected over time that things would settle down, but in the case of the first signs of covid, shorter-term risks went sky high.

All traders should follow VIX Term Structure closely. Not only will you find trade opportunities but it will protect your portfolio from unexpected risks to the entire system.