Thursday, October 11, 2007

More on VIX Futures and Volatility Expectations

Don’t tell anyone, but I call these my “More on…” posts because I can be headline-challenged at times...

Moving right along, thanks to an anonymous poster who reminded me that has excellent free futures data, including intra-day quotes. Since I last checked out their site, they have considerably expanded the information available on the VIX and the newer volatility futures. For easy reference, I have added a link the volatility futures quotes in the upper right hand corner of the blog.

Yesterday I posted a CBOE chart of the VIX futures data out through August 2008 that showed VIX futures pricing in increased volatility over the next ten months, with most of that priced in as short-term mean reversion anticipated during the November options/futures expiration cycle.

Expanding on that theme somewhat, today’s chart compares the life of June 2008 VIX futures (VX-M8 CF) to the cash VIX for the past year. While you would expect the cash VIX to be considerably more volatile than a futures contract 8-12 months out (recall the February 26-27 cash vs. futures VIX action) this was not the case during the July through August VIX spike and only began to become apparent by the higher readings that persisted in the June 2008 futures after the cash VIX began to subside. What I find particularly interesting about the current situation is that once the cash VIX dropped below 21.00 and kept dropping all the way down to the 16.08 reading earlier today, the June 2008 futures refused to follow. The two different Y-axes somewhat obscures the absolute numbers involved here, but the key takeaway – that of an increasing divergence over the past month – is hard to miss.

It should come as no surprise that the futures and the VWSI are saying the same thing. Once again, the big questions are how long it will take for the spread between the cash VIX and futures VIX to narrow and whether it will be more of a rising cash VIX or a declining futures VIX that will be responsible for a narrowing spread.


Ben Bittrolff said...

Well, today's sudden u-turn in equities should give a little life to the VIX...

... and everybody was just getting comfortably complacent again. I mean, SP 1700 by the end of the year for sure right?

TheFinancialNinja said...

hey Bill
I scored BIG
i bought the VIX OCT 16 call at 16.3 for 1.10
i went on a break
and came back one hour later
and the call was at 2.90
WOW!!!!nearly 300% profit...

then i saw the VIX at the 100 day = 19.26
so I bought a OCT 19 put

so, now if my next scenario will play out
VIX back down to 16.5 or so
and then buy the VIX, and hold till market pullback = 5% to the DOW"S 50 day
i have DOW at 14,280 as the short the market signal..
14,000 ( = last high, July? ) plus (2% = thomson financial Q3 estimate S&P 500) = 14,280

Unknown said...

You did a chart a couple weeks ago where you showed the VIX performance after the three days in history when it dropped 20% or more in one day. Do you have an updated version that extends further out to show how the VIX continued to perform?

Bill Luby said...

Nice work, z-stock. I suspect we won't see 16.50 soon, but who knows?


It's all hands on deck today, so I probably won't be able to answer your question until over the weekend, but you might be able to at least eyeball what has happened since the last post and data set.



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