Wednesday, July 21, 2010

VIX Expiration and Term Structure

July VIX options and futures expired this morning with a settlement price of $23.79. For any newcomers to the volatility scene, here's a quick review of two sources you can use to find the settlement price. First, the Chicago Board Options Exchange (CBOE) publishes the data within an hour or two after the open of expiration day within their Index Settlement Values page. Second, most charting platforms allow you the ability to chart the settlement price using the symbol $VRO.

[Source: CBOE]

In last week's A Volatility Inflection Point? post, we highlighted a short July 24 put play (for $.65 credit) to game an expected bounce in the oversold VIX. While the Volatility Index ended up settling just below 24, the position still produced a profit. Over the last few days, traders had numerous opportunities to cover the short puts anywhere from $.05 to $.10. This expiry cycle illustrates well the treachery of holding short options all the way to the end in an attempt to eke out every last penny.

Even though it looked as if a settlement above $24 for the VIX was all but guaranteed on Monday, Tuesday's kamikaze run for the short puts pulled the rug right out from under that viewpoint. Furthermore, quirky things have been known to happen around VIX expiration, making holding short, close to the money options into expiration all the more foolish. Though the settlement price came out to $23.79, who's to say it couldn't have been $23? A solid, profitable trade could very well have turned into a loser.

Here's an updated look at the current VIX term structure. The setup isn't really much different from last month as highlighted in the June VIX Settlement and Term Structure post. The futures remain in contango, albeit a bit steeper this go around and at higher levels than last month (click image to enlarge).

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