Trade VIX using moving averages

The CBOE Volatility Index (VIX) measures volatility expectations in the next 30 trading days and is calculated based on put options and call options activities. Volatility indicates the degree of volatility in the price of a security over a period of time.

Volatility can be measured as the difference between asset prices and market indexes (such as the S&P 500). The greater the volatility, the greater the risk associated with securities. By drawing the moving average of the volatility index, investors can find the trend of the stock market.

Key points

  • The CBOE Volatility Index (VIX) measures volatility expectations in the next 30 trading days and is calculated based on put options and call options activities.
  • Volatility represents the magnitude of changes in the price of a security, such as a stock or commodity.
  • CBOE VIX shows the market’s expectations for recent price changes in the Standard & Poor’s 500 Index (SPX).
  • VIX represents the expectation of rising or falling volatility, which is why it is often referred to as the fear index.
  • Therefore, the price changes of the S&P 500 index and the stock market are negatively correlated with the price changes of VIX.

Understand moving average and VIX

Volatility represents the magnitude of changes in the price of a security, such as a stock or commodity. VIX is an index that shows the market’s expectations for recent price changes in the Standard & Poor’s 500 Index (SPX). VIX measures the intensity of price changes by using the price of index options that expire in the short term. Therefore, VIX represents a short-term forecast of volatility.

Fear Index

Option contracts give the holder the right to buy (call options) or sell (put options) the underlying assets, such as stocks, securities or indexes, at a set price (strike price). Options have premiums or fees associated with them, and holders can debit or credit the premiums, depending on whether they buy or sell options. Every option contract has an expiration date (or expiration date).

Volatility is an integral part of option contract pricing, and it is included in the premium. If the volatility of the underlying index (such as SPX) is expected to rise or fall, the option premium may rise or fall. Therefore, option premiums provide insight into price changes and expectations of future volatility.

Since market prices can rise or fall based on good or bad news, VIX represents the expectation that volatility will rise or fall, which is why it is often referred to as the fear index. In other words, if the market expects that exogenous events such as economic recession will bring great volatility, VIX will soar.

Conversely, if the market expects the economic conditions to be calm and stable, VIX will fall. Therefore, the price changes of the S&P 500 index and the stock market are negatively correlated with the price changes of VIX.

Moving average

Moving average (MA) is a visual representation of the historical closing price of a stock or security within a certain number of days. The moving average is calculated by taking the average or arithmetic average of closing prices during the period. For example, a 20-day moving average contains the closing price of a stock or security 20 days before, and a 200-day moving average contains the closing price of the past 200 days.

Moving averages are helpful to investors because they can help identify the trend of stocks and whether the trend is up or down. However, because moving averages are based on historical prices, they are considered lagging indicators.

For example, a 200-day moving average will have a greater lag than a 10-day moving average because it contains older prices. However, short-term moving averages, such as the 20-day moving average, will be more sensitive to short-term price changes than the 200-day moving average. However, by drawing the short-term and long-term moving averages of the stock on the chart, investors can see whether the recent price changes (called price action) confirm or contradict the long-term trend.

Investors pay close attention to some moving averages to determine trend changes. For example, if a stock’s 50-day moving average exceeds its 200-day moving average, it is considered a bullish trend change, which means that the price trend is higher (or uptrend). Conversely, when the 50-day moving average is below the 200-day average, it is considered a bearish signal, which means that the price is going down in a downward trend.

Trading volatility

Although VIX focuses on the S&P 500 index data, traders and hedgers can also check the Nasdaq 100 through the CBOE Nasdaq Volatility Index (VXN) and the Dow Jones Industrial Average through the CBOE DJIA Volatility Index (VXD) .

The moving averages applied to VIX form the basis of various trading strategies in a wide range of instruments, such as SPDR Trust (SPY), as well as volatility-based futures contracts and exchange-traded funds, including:

  • CBOE Volatility Index Futures (VIX)
  • Standard & Poor’s 500 VIX Short Term Futures ETN (VXX)
  • VIX Short-term Futures ETF (VIXY)
  • Standard & Poor’s 500 VIX Interim Futures ETN (VXZ)

However, it is best to apply technical analysis directly to the index and avoid futures or fund calculations, because the pricing of these instruments will fall through the rollover rate of return and the futures price, which reflects the time change between the futures price and the spot price. Smart traders can overcome this deterioration by rolling futures contracts, but funds track continuous charts, which makes them unsuitable to hold for more than a few days.

Traders use long-term and short-term VIX charts to measure volatility trends, looking for resonant exposures to stocks, options, and futures. A rise in VIX tends to increase the correlation between stock indexes and related components, making index funds more attractive than individual securities. The falling VIX reversed this equation and supported the stock picking market, where individual securities offer better trading opportunities than index funds.

VIX Daily Moving Average

The moving averages applied to the daily and weekly VIX measure long-term changes in market sentiment and shock events that trigger vertical peaks outside of the basic pattern. These sudden increases in fear levels, whether due to unstable economic data, natural disasters or exogenous events, will have a negative impact on investor psychology. Therefore, it may trigger emotional selling pressure and cause the stock market to fall sharply.

The 50-day and 200-day simple moving averages work well together on the daily VIX chart. As a reminder, VIX is negatively correlated with the stock market. Moving average crossovers can mark a major psychological shift. Generally, a VIX 50-day crossover point below its 200 days indicates an improvement in sentiment (increasing stock prices), while a 50-day crossover point above 200 days indicates deterioration (declining stock prices).

For example, the VIX 50-day moving average fell below 200 days in August 2020. Despite some volatility in the market in the following days, the S&P 500 index rose. Due to peaks and subsequent recovery, crossovers often occur, allowing careful technicians to switch between rising fear and returning complacency.


Once the volatility index peaks in September and late October 2020 fade, the 50-day moving average of the volatility index will fall back from the 200-day moving average. As a result, the S&P 500 Index rose from approximately 3,400 points in August to more than 3,700 points at the end of the year.

In addition, we can see that usually, when the price of VIX moves toward its 200-day moving average, volatility subsides and moves sideways; similarly, the S&P 500 index trades in a similar pattern. However, once the VIX price breaks through its 200-day moving average, the S&P 500 index will have a similar trend.

The momentum behind the trend of VIX affects the reaction of the S&P 500 index and can determine the degree of stock trend. If the volatility index is hovering near its 200-day moving average with almost no direction, it is unlikely to cause significant stock market volatility.

VIX weekly moving average

The weekly VIX chart tracks long-term changes in sentiment, including the transition between bull and bear markets. The relationship between VIX and the 200-week moving average is particularly helpful in detecting trend changes.

VIX surged in October and November 2018, pushing the VIX 50-week moving average to break through 200 weeks. As the stock market fell from approximately 2,900 points to slightly below 2,450 points in the last three months of 2018, the negative correlation between the VIX and the S&P index is emerging.


At the beginning of 2020, with the start of the coronavirus pandemic and the fear in the market rampant, VIX’s response was to soar to much higher than 80 in mid-March 2020. As a result, the S&P 500 Index fell from nearly 3300 to 2200 (more than 30%) in more than a month.

As the VIX begins to fall from late March to June 2020, we can see that the S&P 500 index gradually rises, breaking the S&P’s pre-pandemic high in August 2020. We can also see that the 50-MA of VIX has crossed the 200-March 2020 moving average. However, even though the VIX has fallen from its highs, the moving average will lag behind the S&P 500’s recovery rebound in the coming months.

In other words, long-term charts like weekly charts will lag behind volatile markets in the short term, which is why it is important to observe price changes in VIX and use multiple time frames when analyzing charts.

Bottom line

The moving average applied to the CBOE Standard & Poor’s Volatility Index (VIX) eliminates the natural volatility of the indicator, allowing short-term traders and long-term market timers to obtain highly reliable sentiment and volatility data.

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