Thursday, December 17, 2009

Quick VIX Question

Could you explain why sometimes there are big differences between VIX cash and futures?

The VIX cash is a gauge of the expected volatility of the SPX over the next 30 days. So the cash will fluctuate day to day based on changes in option traders’ expectations of volatility in the near term. Currently the VIX is sitting at 21.75. If we break that down into expected daily moves, the S&P should realize a move of 1.37% or less roughly 68% of the time.

If you’re of the opinion the S&P will move a lot more than that, then you’d lean towards being a volatility buyer here. Conversely, if you believe the S&P will move much less than that, then you’d lean towards being a seller of volatility. VIX futures, on the other hand, are simply a snapshot of where the VIX is expected to be at a specific date in the future. Take the Feb VIX future currently trading at 26.70 for example. This simply tells us that the cash VIX is expected to be at 26.70 on February expiration. It says little about what the VIX is likely to do in between now and then.

VIX futures, particularly the longer dated ones, are often times not influenced at all by what’s going on in the cash VIX. Because the day to day moves in the cash are viewed as “noise” or short term aberrations, they are often ignored by longer dated futures. So don't be surprised if a big move in the cash VIX fails to even budge long term futures. Just remember the futures are pricing in any type of mean reversion expected to take place between now and then.


Anonymous said...

Thanks a lot for the quick answer to the quick question.


Tyler Craig said...

No problem-


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