Negative Vix premium signals vol spikes, research finds
Unusual pattern seen in Covid crash could help volatility sellers avoid future reversals
Investors betting on market calm might want to pay closer attention to the premium in futures contracts linked to the CBOE Volatility Index.
Vix futures typically trade at a premium to the index but inexplicably cheapen ahead of bouts of volatility, new research from Ing-Haw Cheng, a professor at Dartmouth College’s Tuck School of Business, reveals.
When this happens – as it did during the market selloff in March – volatility sellers should reverse gears and go long volatility, Cheng says.
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