Wednesday, December 3, 2014

Market Indicators I Like: 1) VIX Futures Premium

From time to time, I'll be listing market technical indicators I use to gauge the strength of the US Stock Market.

From the front page of iVolatility.com, I like to look at the VIX Futures Premium. It measures how much more are hedgers willing to pay for Implied Volatility  (i.e. the risk premium for options on the S&P 500 Index) in the future two months than in the current spot market. If hedgers are worried of an upcoming downturn, they are likely to pay more for the current spot market protection than for future, bringing the Premium down to negative levels. If, on the other hand, hedgers are less worried about the risk of a market downturn, then they will be less eager to buy protection now, then in the future, making the Premium higher.

iVolatility instructs its users that a VIX Futures Premium:

Premiums for a normal term structure are 10% to 20%, while premiums above 15% appear to suggest a lack of enthusiasm for VIX hedging. Premiums less than 10% suggest caution and negative premiums are unsustainable suggesting an oversold condition. 
 Today at market open the premium is at +15.37% suggesting a continuation of the uptrend.

I recommend that every Monday morning you read, like I do, their weekly newsletter.


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