This post is not so much about a spread betting strategy but an indicator that can be used to predict when the markets (share markets) will turn. The VIX index AKA the Fear Guage is a good indicator to use when spread betting shares. At present the markets are getting quite frothy, rampant even. The reasons for this include the massive injections of money into financial systems in the western world. It has given some people watching the markets ‘the shivers’, as quoted by Alan Abelson on Barron’s.
So what’s the VIX index and how can it be used for spread betting
Share markets are often said to be driven by fear and greed. It’s comes down to crowd psychology where there’s an event that makes everyone either greedy and wanting to invest buy more, or fearful of the future causing ‘the crowd’ to sell like crazy.
The VIX index measures expected volatility in markets by using clever algorithms based on the options market. In basic terms options can be used as a form of insurance by professional investors against a large drop in the market.
How can the VIX index be used as part of a spread betting strategy?
Spread betting relies on market volatility. Share prices must be moving either up or down for a spread trade to become profitable. As an gauge of expected volatility the VIX index is great at indicating when market will turn. Not exactly when, but it’s enough to focus the attention. Combined with traditional and simple spread trading techniques such as looking a price charts, simple moving averages and volume of shares traded it forms a powerful indicator.
A low reading on the VIX index is an indication of calm in the markets. What spread traders watch out for is a sharp reversal in the index. This would foretell a sudden change in sentiment which is a high probability indicator that markets will drop. Quickly and by large amounts. A high reading indicators significant fear in the market and normally accompanies lows points in the market.