VIX options have monthly and weekly expirations and trade during regular U.S. trading hours as well as a restricted global trading session (2:00 a.m.to 8:15 a.m. CT). The VIX Index is also calculated and disseminated overnight, giving market participants with real-time volatility information whenever fresh information is released.
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.
Can you trade VIX at any time?
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.
When do SPY options cease trading?
Monday through Friday, global trading hours are from 2:00 a.m. to 8:15 a.m. (Chicago time), and regular trading hours are from 8:30 a.m. to 3:15 p.m. (Chicago time). For further information, go to the Global Trading Hours website.
When do SPY options begin trading?
Pre-Market (4:00-9:30 a.m. ET) and After-Hours Markets are open to investors (4:00-8:00 p.m. ET). Market Makers and ECNs can only participate if they want to, hence these sessions may have less liquidity and lower prices.
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.
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 little items that have a minor impact on the market.
What is the future of VX?
CBOE Volatility Index(VX) Futures are the trademark contract of the CBOE Futures Exchange (CFE). VX Futures are an estimate of S&P 500 Options implied volatility. They should theoretically climb when volatility rises and reduce as volatility lowers. The VIX is a mechanism that investors use to protect their equity investments from unexpected market moves.
VX Futures allows traders to profit from expected equities market volatility surges. With the Brexit referendum looming and the uncertainty surrounding the outcome, VX Futures prices have risen, signaling higher equity volatility. That is precisely what this graph demonstrates.
On this VX July 2016 chart, we can witness a breakout from the previous few months. The chart had been heading lower since January and February’s highs, but recent Brexit polls, combined with bad US economic data, have propelled the VX Futures out of that short-term downtrend.
VX Futures are a popular instrument for traders navigating volatile market conditions and looking for opportunities to profit from volatility. VX Futures are a crucial signal for market participants and give an outstanding chance for sophisticated investors and traders regardless of direction.