This New Index Is Worth Keeping An Eye On
What once was just an obscure variable for options traders, volatility is now a mainstream financial topic, followed by all types of investors. If you’ve spent any time watching CNBC or reading the financials news, you’ve undoubtedly seen or heard discussions of market volatility.
In fact, the most popular method of trading volatility, the VIX, is prominently featured on CNBC’s top bar (along with gold, major stock indices, and government bond yields). Remember, the VIX is the CBOE’s S&P 500 Volatility Index.
The VIX is commonly referred to as the fear gauge because it can be used to measure investor sentiment. Typically, the higher the VIX, the more worried investors are about a market selloff.
In a nutshell, the VIX measures near term volatility expectations conveyed by stock index option prices. The index is based on a wide range of S&P 500 index options.
Volatility has grown in importance as investors of all types use the information to make trading and risk management decisions. The VIX is used for everything from attempting to predict market movement to when to put on and take off institutional hedges.
Here’s the thing…
As the VIX has grown in popularity, the CBOE has released more and more volatility index products to meet the demand of traders. These days, you can find a volatility index on gold prices, oil prices, foreign stock market indices, and even currencies.
And now there’s one more volatility index product which could be of significance to both institutional and retail investors… the 10-year US Treasury Note Volatility Index (VXTYN).
The VXTYN is just an index to watch at the moment, and doesn’t have tradable products on it yet. But you can bet there will be options available in the near future.
More importantly, simply tracking this bond volatility index could be of value for many investors. You see, the volatility of Treasuries often follows an expected pattern. As such, changes in volatility could signal upcoming changes in the bond market.
In other words, the Treasury VIX could help predict a change in interest rates – or at least signal when investors really start to worry about a rate change. That kind of information is invaluable. Interest rates impact just about everyone.
So, if you’re interested in potentially having a leg up on other investors, it’s not a bad idea to add VXTYN to your watch list. Following bond market/Treasury volatility could provide clues as to when the next turn in the financial markets may occur.
Yours in Profit,
Gordon Lewis
Category: Options Trading
