VIX Futures Premium
For some time now we have been calculating both the Day Weighted and Volume Weighted VIX Futures Premium on a weekly basis and including it in our IVolatility Trading Digest.
The Volume Weighted VIX Futures Premium is calculated based on VIX index spot price, futures prices of two nearest futures and their volumes.
The Volume weighted VIX futures premium= [(VX(M1)-VIX)*V(M1) + (VX(M2)-VIX)*V(M2)]*VIX/V(M1+M2)
VX(M1) and VX(M2) are futures prices of the first and second months,V(M1) and V(M2) are correspondingly their volumes,
V(M1+M2) is their total volume and VIX is the index price.
We believe the amount of premium represents how much the professional investment management community is willing to bid up the futures prices as they implement hedging strategies using the VIX with its higher volatility compared to other hedging alternatives. At the extremes, when negative or when exceeding 20% it usually signals a change in the short-term trend of the VIX and therefore the S&P 500 Index.
For those who may want to follow this timing indicator daily we now have included it on our home page in the Options Data Analysis section, values are calculated based on end of the day data.