The VIX and VXN indexes are measures created by the Chicago Board Options Exchange (CBOE) to gauge market volatility. This guide explains how they reflect market expectations, including reading potential buy and sell signals in chart examples.
What Are VIX and VXN?
- The VIX is the 30-day annualized implied volatility of the S&P 500 Index Options.
- The VXN is the 30-day annualized implied volatility of the Nasdaq 100 Index Options.
When markets crash or move downward quickly, put options often become quite popular. Traders bid up the price of these put options, which manifest as an increase in the implied volatility level. Thus an increase in the VIX and VXN index.
Relationship Between Prices and VIX/VXN
The basic relationship between stock and index prices and the VIX and VXN is as follow:
- When prices fall, the VIX and VXN indexes rise.
- In contrast, when prices rise, the VIX and VXN indexes fall.
The following chart of the S&P 500 exchange traded fund (SPY), top half of chart, shows the inverse relationship between it and the $VIX Volatility Index, bottom half of chart:
Notice how, in this example, an uptrend in the price of the S&P 500 is accompanied by a downtrend in the level of the $VIX.
The next chart of the Nasdaq 100 exchange traded fund (QQQQ) shows potential buying opportunities when the $VXN spikes higher:
VIX & VXN Potential Buy Signal
When the $VIX or $VXN spike (usually they both spike during the same periods) a trader might go contrarian and buy.
If history repeats itself, buying $VIX and $VXN spikes may prove profitable. Nevertheless, the Mutual Fund mantra applies: “Past performance is not indicative of future performance“.
The trend of the $VIX and $VXN indexes can add another helpful level of analysis to price and volume indicators.
Where to Trade Using Technical Analysis
If you’re interested in trading using technical analysis indicators like implied volatility, have a look at our reviews of these regulated brokers available in to see which charting tools they offer.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.
Learn more about technical analysis charting concepts and strategies, including:
- Market Thrust
- Mass Index
- Herrick Payoff Index
- Directional Movement Index
- Commodity Channel Index
- Commodity Select Index
- Swing Index
- Stochastic RSI
- Ulcer Index
For all the basics on how to trade commodities, see our introduction to commodity trading.