Tuesday, February 17, 2009

Last Trading Day for VIX February Options. Try VXX Instead?

With Europe and European financial institutions under pressure this morning and the SPX futures down more than 3% about ten minutes before the open, investors will likely be looking for some portfolio protection in today’s session.

Normally, I would be thinking about VIX options here, but since today is the last trading day for February VIX options (which expire at the open tomorrow) and March options will not provide the same level of juice, this might be a good time to look at VXX, the short-term VIX ETN that is based on VIX futures.

VXX does not have much of a track record so far, but it has been moving at about 75% of the rate of the cash/spot VIX. If the SPX were to drop 3+% today, I would expect VXX to gain in the area of 10%.

Also, today should be a good day to see if VXX volume provides clues about market sentiment. Eventually, VXX volume peaks should provide some bullish contrarian sentiment clues, but it is too early to be able to get a good read on these as of yet.

[source: StockCharts]


Alex said...

VXX is diverging from the VIX quite a bit today. VXX is up around 6% at the moment but VIX is up over 16%. I'm guessing the divergence gets worse the more VIX moves from its mean. Normal moves in the VIX may be well correlated but large moves will likely be muted.

Bill Luby said...

You are exactly correct, Alex.

On big moves I'd expect VXX to be more in the range of 50% of the VIX move in percentage terms. On more typical days, I'd expect something along the lines of a 75-80% tracking, on average.

I am not sure how the three day holiday impacts VXX relative to the VIX, but I guess we are getting our first good data points today.

When we can short the VXX or have an inverse ETF, then this game will be a fun one.



Alex said...

I agree. Now I understand that VIX futures (and the VXX) will likely price in some mean reversion, but why isn't someone out there arbitraging the difference between the futures and the spot VIX? Is it that difficult to replicate the spot VIX with a portfolio of S&P options?

Bill Luby said...

I'm sure the arbitrageurs are all over the VIX ETN vs. VIX futures.

As for a synthetic cash VIX with SPY/SPX options, I'd love to hear about anyone attempting to do this.

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