The S&P 500 VIX Short-Term Futures Index replicates a position that rolls the nearest month VIX futures to the next month on a daily basis in equal fractional amounts by using the prices of the next two near-term VIX futures contracts. This results in a rolling one-month long position in VIX futures contracts for the first and second months.
S&P 500 VIX short-Term Futures: What Are They?
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.
What exactly is the VIX future index?
VIX futures were first traded on the Cboe Futures ExchangeSM (CFE) in 2004. They allow market participants to trade a liquid volatility product based on the VIX Index methodology. VIX futures reflect the market’s prediction of the VIX Index’s value at various future expiration dates. VIX futures give market players a number of ways to put their ideas into action through volatility trading tactics such risk management, alpha generation, and portfolio diversification.
What is the S&P 500 VIX short-Term Futures ETN from Barclays iPath?
The iPath Series B S&P 500 VIX Short-Term Futures ETN is designed to allow investors to wager on the size of swings in the S&P 500 SPX, +1.11 percent, which is tracked by an index linked to daily readings of Wall Street’s so-called fear gauge, the Cboe Volatility Index VIX, -6.10 percent, or VIX.
What is the S&P500 VIX Index?
The Cboe Volatility Index (VIX) is generally known as the “Worry Index” because it measures the level of fear or stress in the stock market using the S&P 500 index as a proxy for the entire market. The higher the VIX, the more fear and uncertainty there is in the market, with levels exceeding 30 signaling extreme fear and uncertainty.
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.
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.
By CFE
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.
What does a normal VIX value look like?
The VIX tries to predict future volatility for the next 30 days, but it isn’t very accurate. A VIX of 25 does not always imply that volatility will average 25% over the next month or so. According to studies, the VIX tends to overestimate volatility by 4 or 5 percent on average. However, research have shown that the VIX has some predictive validity. Here are some basic rules for interpreting the VIX level in terms of future volatility:
- When the VIX is between 0 and 12, volatility is predicted to be minimal. In November 2017, the VIX had its lowest daily closing value of 9.14.
- VIX 13-19: This range is considered normal, and volatility over the next 30 days is predicted to be normal when the VIX is at this level.
- When the VIX reaches 20 or higher, you can expect higher volatility than usual over the next 30 days. This level is usually reached during periods of market stress, such as when fears of an economic downturn or recession are present. The VIX can reach 50 or higher during major market shocks like the financial crisis or the emergence of a global epidemic.
Unexpected occurrences can throw markets for a loop, and a low VIX number today could be followed by a period of significant volatility if conditions shift.
How do you interpret the VIX of the S&P 500?
A VIX number below 20 indicates a perceived low-risk environment, whereas a reading above 20 indicates a period of increased volatility.
Because it surges during market upheaval or periods of great uncertainty, the VIX is commonly referred to as a “fear index.” The VIX, for example, peaked in the fall of 2008, during the height of the global financial crisis, reaching beyond 80 by the year’s end. From mid-September 2006 to the end of February 2007, when markets were performing strongly, it remained below 13.5.
A low VIX reading is regarded by some contrarian investors as a pessimistic indication, signaling market complacency that may portend bad news ahead, while a high VIX reading is regarded as a positive signal by others.
However, research shows that stock markets perform better in the aftermath of low VIX values than in the aftermath of high VIX readings.
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What is the relationship between VIX and the S&P 500?
The S&P 500 VIX correlation is simply the relationship between the S&P 500 and the VIX. The substantial negative link between the stock market and the VIX may be seen in the graphic above. When the stock market falls, the index rises. The connection between daily movements in the S&P 500 and the VIX has been -77 percent since the VIX’s inception in 1990. The adverse correlation has gotten even stronger over the last ten years, now standing at -81 percent, up from -74 percent prior to October 2008.
The tighter association may be due to the different products that have been created over the last 10-15 years that allow market players to trade the VIX. As previously said, this would also explain why we are witnessing greater increases in the VIX when the market declines, as VIX trading causes exaggerated movements in implied volatility.
The link between the S&P 500 and the VIX, on the other hand, has mainly been steady and predictable across time. Over the last ten years, the rolling 1-year correlation between daily changes has averaged around -83 percent, maintaining within a rather narrow range of -70 percent to -90 percent.