VIX Futures Spread as an Indicator

Lots of people who trade or invest in the stock market like to look at the VIX Index, and there are hundreds of ways to analyze it with Bollinger Bands, moving averages, standard deviation, and other methods of slicing and dicing its messages.  This week's chart shows a way to compare the spot VIX Index to the pricing of the VIX futures contracts.

The VIX Index is based on the pricing of SP500 Index options.  When risks go up, the price premiums on those options goes up, much like the way that buying hurricane insurance costs more in Miami than it does in Minneapolis.  The fluctuations in the VIX reflect the vacillating perceptions of risk among options traders.  Not surprisingly, when stock prices go down, people start thinking about risks more and the VIX goes higher.

VIX futures are related to the VIX Index, but not immediately in a direct way.  VIX futures represent the bets placed by futures trades about what the VIX Index's value will be several months into the future when that contract expires.  So the futures do not necessarily react as violently to price action in the market as the VIX does.  That makes the prices of the VIX futures useful as a baseline for what an overly exuberant or complacent VIX Index value might be.

This table shows closing quotes for the VIX Index and its futures on March 6, 2025 just as an example.  The VIX Index at the top is at 24.87, which is higher than the price of all its futures contracts.  It is interesting to note that on that particular day, the VIX rose by 2.94 index points, or 13.4%, while most of its futures contracts actually fell some.  A lot of the time it is the farthest contract in the future which will have the highest price.  But in this example, it is the March 2025 contract (H25) which has the highest price.  It is getting close to expiration, and so futures traders are going to adjust their pricing as that expiration day gets closer so that any premium or discount from the spot VIX Index will be worked off by expiration day.

The indicator in the chart above reflects the spread between the VIX Index and whichever of its futures contracts has the highest numerical price each day.  So right now that means the spread from the March 2025 contract.  When this indicator goes negative as it is right now, that says the VIX Index is currently above all of its futures contracts.  This is a fairly rare condition, and indicative of a bottoming condition for stock prices.  But that does not necessarily mean that the bottom is done just because of a negative indicator.  Bottoming can sometimes take a while.

There is another way that we can use the message of VIX futures contract pricing to get a useful indication.  This next chart once again uses the price of whichever is the highest price VIX futures contract, but uses that data by itself instead of in comparison to the VIX Index.

I have plotted that VIX futures pricing data on an inverted scale to allow us to better see the correlation to the SP500.  Most of the time the two plots are doing almost exactly the same thing.  But sometimes we see a divergence, like the one which developed in 2024, and that says trouble is brewing.

The trading of VIX futures only first started in 2004, and it started slowly at first so we do not have good data until just a few years ago.  We cannot look back and know what this indicator might have told us in 1987's crash, for example, because the VIX itself was not even invented until 1990.  So we have to deal with the data we have.

What this chart shows us, though, is that when there is a divergence between the SP500 and the price of the highest VIX futures contract, that is worth paying attention to.  A divergence does not mean that a top has arrived, but it tells us that we may be building a much more significant price top than just an ordinary one.  The current message of this latest divergence is that the stock market in 2025 is going to have some big corrective work to do.

PRIOR ARTICLES
Aug 01, 2024 - VIX Futures Spread Indicator
Mar 15, 2023 - VIX Index Above All Of Its Futures
Oct 23, 2020 - VIX Open Interest Says This is Not a Top