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 can we learn from the VIX?
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.
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 possible to buy VIX futures?
The VIX, like all indexes, is not available for direct purchase. 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.
What does trading the VIX imply?
The VIX, which is a measure of volatility, can be traded through exchange-traded funds that monitor it in order to earn short-term gains or hedge equity market volatility.
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.
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.
How do you interpret the VIX?
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 does it signify when the VIX is negative?
When the VIX is low, what does it mean? When the VIX is low, it indicates that the market is less fearful, that there is greater stability, and that long-term growth is possible. The VIX has a negative correlation with the S&P 500, which means that when the VIX is low, the S&P 500 is usually rising in price.
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
The notional value of a VIX Futures contract is $1000 times the index. Futures trade in increments of 0.05 or ($50 a tick), but calendar spreads may be quoted in increments of 0.01 ($10 a tick).Spot VIX is calculated and quoted outside of US trading hours, beginning at 2:15 a.m. Chicago time, which coincides with European markets opening.
The CBOE Futures Exchange has been listing VIX Futures expiring every week for several weeks in a row.There are also standard VIX Futures contracts that expire every month. Standard expiration is typically on a Wednesday, which is 30-days before the following month’s standard third Friday SPX option expiration date.Figure 2 shows VIX futures quotes from August 15, 2016.
The quotes above are a mix of VIX Weeklys Futures and conventional VIX futures. VIX/Q6 is the standard VIX contract for August. The quotes that start with numbers are VIX Weeklys Futures, and the numbers indicate when week of the year these contracts expire.
VIX Futures are AM-settled contracts, with the final settlement value being the VIX Index’s Special Opening Quotation (SOQ). The SOQ is generated using the opening prices of constituent SPX or SPX Weeklys options that expire 30 days after the relevant VIX expiration date. VIX futures final settlement value is broadcast using the ticker VRO. The day before settlement is the last trading day for VIX Futures, therefore a contract set to expire on Wednesday morning will stop trading at 3:15 pm Chicago time the day before settlement. This means a contract set to expire will not trade during non-US hours on the day of settlement.
VIX Futures contracts may trade at a premium or discount to spot VIX and other VIX futures. The majority of trading days, VIX Futures are at a premium to spot VIX, as well as to futures contracts that expire before the contract’s expiration date.Figure 3 shows spot VIX and the standard VIX futures contract pricing the Friday before and Friday after the recent Brexit vote.
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.
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.