Wednesday, June 16, 2010

VIX Settlement and Term Structure

June VIX options expired today with a settlement value of 26.11. Long time readers know the settlement price can be viewed a couple different ways. First, the CBOE usually publishes the price within a few hours of the open on its Index Settlement Value page. Second, you can view the price in a charting platform using the VIX's settlement ticker symbol $VRO. If you take the charting route, keep in mind the settlement value is simply one value per month. Since it doesn't have an Open, Close, High, or Low, you can't view it very well on a bar or candle chart. So stick to a line chart and you should be fine. One of the benefits of using the chart versus the CBOE page is having the ability to simultaneously see past VIX settlement values to better grasp how the VIX has progressed over time.
[Source: MachTrader]

A survey of the current volatility landscape shows the VIX futures in contango with the July's at a 2.5 point premium and the Aug's at a 3.35 point premium to the VIX cash. Given the precipitous drop in volatility this week, it's not surprising the futures are now above the cash and in contango. Remember, the futures are pricing in any type of mean reversion expected to take place between now and then. A quick assessment of the term structure simply shows us the expected mean is higher than the current VIX cash. Whether or not the futures have it right remains to be seen (click image to enlarge).

For related posts, readers can check out:
Settlin' Them VIX Options
VIX Options
Lessons Learned from a VIX Put Matrix