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THE VIX FUTURES SPREAD COULD BE FORECASTING A DOWNTURN

24 October 2009 by Cullen Roche 2 Comments

Interest chart here from Bloomberg.  They note the extreme spread in VIX futures which could be forecasting a  very high amount of hedging from smart money investors:

As the CHART OF THE DAY shows, though, the gap between the index and VIX futures is wider than it was almost 14 months ago. The contracts closest to expiration settled yesterday at 23.65, or 2.96 points higher than the index’s value. The differential was just 1.05 points at the end of August 2008.

VIX

“Heavy hedging activity” accounts for the wider gap, according to a report yesterday from McMillan Analysis Corp.’s Option Strategist Hotline. The VIX itself has to surpass 24 to signal an increase in stocks’ volatility, which tends to occur when prices fall, the report said.

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Comments
  • Trader Kitteh

    The logic in the article is backwards it seems. It states that the spread was 1.05 at Aug 08, just on the door step on the downturn. So what we know as a proven fact, is that a small spread signals complacency (leading to a crash…). The spread is large now, shouldn’t the inference be that investors are overly gittery (hence a crash unlikely) ?

    10/24/2009 at 12:17 PM
  • CF

    Kitteh – I agree with you. It seems unlikely that there is a major downturn when people are expecting it to happen.

    10/25/2009 at 11:13 AM