It is the UK’s answer to the popular Chicago Board Options Exchange Volatility Index - or VIX for short. Traders call it the "fear gauge" because it effectively measures ‘fear’ in the market over the following 30 days...
Specifically, it measures how much premium investors are willing to pay for protective options on their portfolios. When it’s high, investors are scared.
In principle, the higher the VFTSE goes, the bigger the expected swing in the FTSE. And remember that stocks tend to be a lot more volatile on the downside than the upside.
You can see from the chart below the inverse relationship between the VFTSE (in red) and the FTSE 100 (in black). When fear goes up, the markets go down. This relationship highlights the significance of this indicator. The latest reading of 31 - down from a peak of nearly 80 last September - is a sign of the falling volatility, or fear, in the market today.
You can see from the chart that the trend is steadily ticking lower. This means investors are becoming less risk averse.
Understanding the VFTSE is to understand the mood of the market. And that mood is less bearish than it was just a few months ago. Investors are not paying so much in options premiums to protect their portfolios. That’s potentially good news for buyers, but even better news for those already in the market.
Editor’s note: Theo Casey breaks down the VFTSE and how to use it as a Buying signal in the latest issue of The Fleet Street Letter. Click here to receive this guide and all of The Fleet Street Letter’s current investment recommendations.
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