Volatility has emerged as an asset class over the last decade, with VIX Futures leading the way. In 2004, the CBOE Volatility Index (VIX) was used to launch financial futures trading. This was the first time a publicly traded derivative that allowed investors direct exposure to projected market volatility was accessible for trading. If you’re thinking about adding volatility to your trading and portfolio management toolbox, there are a few things to keep in mind before you get started.
What Does the CBOE Volatility Index (VIX) Indicate?
VIX is a standardized measure of near-term volatility based on option pricing for the S&P 500 (SPX).
The VIX is calculated using two separate expiration sets of SPX options, with the two series being time weighted to produce a consistent 30-day measure of implied volatility.
When the S&P 500 is under pressure, the demand for SPX put options rises, causing VIX to rise.
Because of the heightened demand for portfolio protection when the market is under pressure, VIX has earned the moniker “The Fear Index.”
2. The VIX Index and the S&P 500 Index
Traders have been trained to believe that when the S&P 500 falls, VIX increases, and when the S&P 500 rises, VIX falls. This view has some merit because the long-term daily price change connection between the S&P 500 and VIX is extremely close to -0.75. On occasion, though, both the S&P 500 and the VIX move in the same direction. In fact, VIX and the S&P 500 price moves move in the same direction on around 20% of trading days. From January 2004 through July 2016, the table below shows the link between VIX and the S&P 500 on days when equities were higher and days when they were lower.
From August 2015 to July 2016, the daily price action in the S&P 500 and VIX is seen in the chart below.
There have been a few instances where the S&P 500 has dropped off sharply, and VIX has surged in reaction.
Contract Specifications for VIX Futures
A VIX Futures contract has a notional value of $1000 times the index. Futures trade in 0.05 or ($50 a tick) increments, but calendar spreads may be quoted in 0.01 ($10 a tick) intervals. In June 2014, the trading hours for VIX Futures were extended to nearly 24 hours a day, five days a week. Spot VIX is calculated and quoted outside of US trading hours, starting at 2:15 a.m. Chicago time, which is when European markets open.
The CBOE Futures Exchange has been listing VIX Futures expiring each week for multiple weeks in a row for just over a year.
There are also regular VIX Futures contracts that expire every month.
Standard expiration is usually on a Wednesday, which is 30-days before the standard third Friday SPX option expiration date the following month.
The VIX futures quotes from August 15, 2016 are shown in Figure 2.
VIX Weeklys Futures and regular VIX futures are used in the above quotes.
The VIX/Q6 contract is the typical VIX contract for August.
The quotes that start with a number are VIX Weekly Futures, and the numbers denote the week in which these contracts expire.
VIX futures are contracts that are settled in the morning.
The final settlement value for VIX Futures is the VIX Index’s Special Opening Quotation (SOQ). The SOQ is derived from the opening prices of constituent SPX or SPX Weeklys options that expire 30 days following the VIX expiration date. The ticker VRO is used to communicate the final settlement value for VIX futures. The day before settlement is the last trading day for VIX Futures, thus a contract that is set to expire on Wednesday morning will stop trading at 3:15 p.m. Chicago time the day before settlement. This means that on the day of settlement, a contract slated to expire will not trade during non-US hours.
Spot VIX and other VIX futures may trade at a premium or discount to VIX Futures contracts.
The majority of trading days, VIX Futures are trading at a premium to spot VIX as well as futures contracts that expire before the particular contract’s expiration date.
The pricing of spot VIX and regular VIX futures contracts on the Friday before and after the recent Brexit vote is shown in Figure 3.
RISK DISCLAIMER: Trading futures products carries high risk of loss, which must be acknowledged before trading and may not be suitable for all investors. Actual trades or methods referenced above may have performed well in the past, but this does not guarantee that they will perform well in the future. Phillip Capital Inc. bears no responsibility for errors or omissions in the material included herein, which is supplied to you solely for informational purposes and is believed to have been derived from reliable sources but cannot be guaranteed. The author’s thoughts and opinions in this letter are his or her own and do not reflect those of Phillip Capital Inc. or its employees.
Is it possible to buy VIX futures?
You can’t even buy a basket of underlying components to mirror the VIX, unlike a stock index like the S&P 500. Instead, futures contracts and exchange-traded funds (ETFs) and exchange-traded notes (ETNs) that own those futures contracts are the only ways for investors to gain access to the VIX.
Which ETF tracks VIX the most closely?
The iPath S&P 500 VIX Short-Term Futures ETN is one of the most popular VIX ETFs (VXX). This product has a long position in daily-rolling VIX futures contracts for the first and second months.
How is the spot VIX determined?
The VIX is derived by multiplying the number of days in a month by the number of days in “By averaging the weighted prices of out-of-the-money options and calls, you may compute predicted volatility.” In the example below, we’ll start on the far left of the formula with options that expire in 16 and 44 days, respectively. On the left, there is a symbol ” symbolizes the result of multiplying the square root of the sum of all the integers to the right by 100.
What is the best way to sell my VIX options?
- Investors have traded the CBOE Volatility Index (VIX) since it was first created as a measure of investor sentiment regarding future volatility.
- Buying exchange-traded funds (ETFs) and exchange-traded notes (ETNs) related to VIX is the most common way to trade it.
- The iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) and the ProShares Short VIX Short-Term Futures ETF are both VIX-related ETFs and ETNs (SVXY).
What exactly is the distinction between VIX and VXX?
The VIX, or Chicago Board Options Exchange Volatility Index, is the basis for the VXX ETN. By analyzing current prices for put and call options connected to the widely followed index, the VIX represents investors’ views about the S&P 500’s short-term path. The VIX generates an informed forecast as to how much the index will change in the next 30 days. Traders who want to profit from market volatility bets might consider the VXX.
Does VIX trade around the clock?
Cboe Options Exchange has increased global trading hours (GTH) for S&P 500 Index (SPX) and Cboe Volatility Index (VIX) options to nearly 24 hours a day, five days a week. Easily trade or hedge broad U.S. market and worldwide equities volatility from anywhere in the world, at any time of day or night.
What is quad witching day, and why is it celebrated?
Quadruple witching occurs when four different sets of futures and options expire on the same day in the financial markets.
Futures and options are derivatives that are tied to the price of underlying stocks. Traders must close or change positions when derivatives expire. This can result in a large increase in volume and order flow. The following are the four types of derivatives that will expire on quadruple witching:
Note that some lists of quad-witching expirations include single-stock futures. However, these are minor items that have a minor impact on the market.
What exactly are S&P VIX futures?
The iPath S&amp ETN shares, which are constituted as debt instruments, can be bought and traded just like stock. The value of VXX shares often rises during periods of extreme stock market volatility. Quiet periods in the market, on the other hand, are likely to keep shares heading lower. This is why.
Is it time to buy when the VIX is high?
“If the VIX is high, buy” indicates that market participants are overly negative and implied volatility has reached its limit. This indicates that the market will most likely turn bullish, with implied volatility returning to the mean. The greatest option strategy is to be delta positive and vega negative, which means that short puts are the best alternative. Positive delta just means that if stock prices climb, so does the option price, and negative delta simply means that a position gains from lowering implied volatility.