Raise you hand if you have been following VIX futures during the all the volatility we have had over the past month or so. Hmmm. About what I thought. At least you are a relatively honest bunch. (Anyone wanting to dip a toe into the VIX futures water might want to check out my VIX Futures Starter Kit.)
With the chart below as a backdrop, consider that the February 27th VIX spike – and all the subsequent volatility – had virtually no impact on expectations of where the VIX would be in February 2008.
Fast forward five months to the increased volatility at the end of July and we see that the VIX February 2008 futures rose in advance of the cash VIX spike and peaked before the cash VIX top of 37.50 (intra-day) on August 16 (reflected here with the 30.83 close.) While the February futures settlement date is still 5 ½ months out, the VIX futures have persisted in the 20s and currently sit at 21.48, not too far at all from the 22.65 peak on August 17th.
Going forward, think about the VIX futures six months out as a fair proxy for what market participants think about structural weakness in the economy and in our financial institutions and the difference between the cash VIX and these futures as a gauge of fear and panic in the markets. Also consider that the best opportunities for trading the VIX are likely to be when there is the widest gap between how the markets are pricing the cash and futures VIX.