Trade of the week: short VIX
The US Volatility Index (VIX) gapped higher following President Trump's imposition of tariffs on Canada, China and Mexico.
Current trade overview: short position
In the current market environment, a trading opportunity has been identified with the Volatility Index (VIX), also known as the Fear Index. The strategy involves taking a short position based on recent market movements and potential retracement patterns.
Trade setup
- Entry point: short the VIX at 19.43, anticipating a minor bounce
- Stop loss: set at 20.43, positioned above the highs observed in October of the previous year. This stop loss placement is crucial to limit potential losses if the market moves against the position
- Target: aim for a downside target of 17.43, just below the gap closure, to capitalise on the expected decline
Risk-reward ratio
This trade offers a 2-to-1 reward-risk ratio, making it an attractive proposition for those willing to take on the associated risks. However, it is important to note that this is a high-risk trade, and sometimes the best decision is to refrain from trading.
Market context
The VIX has experienced a rise, with a noticeable gap that may or may not close depending on how the US market opens later. Traders should be aware of the potential for further acceleration in the VIX, similar to movements seen in December.
Cautionary note: while this trade presents a structured opportunity, market conditions can change rapidly. Traders are advised to consider their risk tolerance and market outlook before engaging in this trade.
This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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