Perceived Influence of European Central Bank Policies on the VIX: Understanding Market Sentiment in Binary Options Trading
Perceived Influence of European Central Bank Policies on the VIX: Understanding Market Sentiment in Binary Options TradingDecember 27, 2012
Getting a feel for the markets is an acquired and required skill you must develop if you want to put together a successful binary options trading strategy. Before we start, it’s important not to confuse the Euro VIX with the US VIX as traded at the CBOE. The CBOE Volatility Index is structured according to real-time pricing of the S&P 500 Stock Options Index (Symbol: SPX).
The Velocity Index is based on a predictive modeling algorithm that attempts to forecast investor confidence of futures trading based on a 30 day period. The Euro VIX (Symbol:V2X:IND) operates under the same premise, however is influenced by European options as well as government bonds.
So while the VIX may be influenced by the Fiscal cliff and US government politics, the Euro VIX is influenced by fiscal policies and trends dominating Europe. For instance the Spanish bonds rally, the recent resignation of Mario Monti from the seat of the Prime Minister, as well as the loan packages approved by the ECB to Greece greatly influence it.
The European Central Bank (ECB) is the governing European fiscal authority. It’s stated objective is to maintain price stability in the Euro Zone and to draft and implement the monetary policy for the EU countries.
So let’s say you would like to trade the VIX on Anyoption for example. What are the macro-economic parameters you would need to analyze before investing? Technically, there is no significant influence on the VIX by the ECB, only on the Euro VIX, hence you can exclude Euro zone economic trends and fiscal policies in this case, and start looking into US domestic fiscal policy making on Capitol Hill. Chairman of the Fed Ben Bernanke, as well as investors and prominent figures in the financial community, have plainly stated that they see no real bi-partisan efforts being made in order to resolve the perceived upcoming fiscal cliff. These issues, as well as food shortages, natural disasters, housing and mortgage crisis, all tend to drive the US VIX into a whirlwind.
So how can you leverage all of this information when trading binaries? Well, I guess it all really depends on what it is you want to do. If you are looking to trade the VIX you need to checkout the CBOE Put/Call Ratio, the open, high, low, and close figures, as well as the volume of trading on Equity Options. Implementing a Gaussian Model derived via Monte Carlo methods would be a good start for charting and would definitely get you off to a good start when drafting an effective trading strategy.
To put a final nail in the coffin, it’s obvious that the ECB influence is marginal at best when it comes to the VIX, and before you choose a broker and open a real money trading account you must catch up on the financial news and factor this information in to your binary options action plan.
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