The Vix index can be a lot of fun to watch, it can have big moves and a lot of people try to lasso it, which can be entertaining in and of itself. Well it’s my turn to take out my lasso. I have various tools and proprietary algorithms I use to measure movements in option volatility but sometimes it’s the simple charting techniques that can provide some of the best clarity. Many traders will look at the price action of the vix in relation to its Bollinger Bands, this is great and is something I watch as well but all to often it will ride the upper or lower band for too long, constantly popping above and below it which can be frustrating to watch.
One chart overlay that I’ve found to do a fairly decent job of calling out oversold and overbought levels in the vix are price envelopes. They work like Bollinger Bands but rather than using a set standard deviation like the bands, envelopes use a set percentage. Below is a chart of the vix with said envelopes, I’ve put circles around the days when the vix has closed above it’s upper envelope. You can see for yourself the resulting price action. I’ve also noticed a divergence in the RSI which has not made a new high along with the price of the vix. With that all being said, I wouldn’t be too surprised to see some weakness here in volatility. However, all of this could be thrown out the window if Greece does something silly like not pay it’s debt or Merkel puts a ‘do not disturb’ sign on her door when Hollande arrives for his first visit today. While it’s important to respect price action, it unfortunately can’t be looked at in a vacuum.
Disclaimer: Everything in this post is meant for educational and entertainment purposes only. Do not construe anything written in this post or blog as a recommendation, advice, or an offer to buy or sell any securities. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.
