The Volatility indicator (that can be found weekly in our newsletter) is a mean reverting indicator that measures the IV of the market over the last year. A high value suggests decrease and vise-verse: Low value suggest increase in volatility.
What does the indicator mean?
The indicator is based on the changes in the CBOE Volatility Index (VIX) - also known as "the fear index". It is a real time index that follows S&P 500 stock options. By calculating a weighted average of the current market prices for all out-of-the-money calls and puts for the front month and second month expiration it gives a good indications towards were the market is going.
The index's results are in percentage and marks the expected change in the S&P 500 index in the upcoming year, with probability of 68% - one standard deviation of the normal probability curve.
The math behind it
The indicator we publish is the relative rank of the most recent VIX value (on the day of publication) within the previous 252 days.
Hoe to read it
- Red - The current value is in the top 20th percentile of the 252 days.
This means that the volatility is high. You can expect that the volatility will go lower
- Green - The current value is in the bottom 20th percentile of the 252 days.
This means that the volatility is Low. You can expect that the volatility will go higher
- Yellow - The current value is in the between the top and bottom 20 percentile.
This means that the volatility is in in a normal range and shows no real range.