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Plus 500 has launched trading on the CBOE VIX, which measures volatility in the markets.
It’s commonly known as the fear index because when it is at extremes it can signal a market correction. In this case it would be a market crash as major indices have rallied significantly.
The thing to remember though is that in actual fact the VIX is a hopeless leading indicator. If you look at this chart from Investors Intelligence volatility is highest after the market has corrected. So would be VIX traders may see more potential in VIX trading after a crash or rally, with a view to profiting from a reduction in volatility.
Incidentally, if you are looking for a leading indicator that has an anecdotal reputation heralding market corrections when at extremes take a look at the Investors Intelligence Advisors Sentiment Index. The index was making new highs before the recent sell off – an index well worth keeping an eye on for volatility traders or those looking to hedge a net long portfolio.
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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously acting as multi asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2000.