Tuesday, June 19, 2012

Tracking the Fall in VIX Futures

The last four days have seen a dramatic decline in all things related to the VIX. The cash/spot VIX is down 26% from last Wednesday’s close as I write this and the VIX futures have followed the VIX down to varying degrees. The graphic below shows the changes in all the VIX contracts during the last four days – a period during which the entire VIX futures term structure has fallen sharply.

As is usually the case, the decline in the front month (June) contract is the sharpest of the group and has actually exceeded the decline in the cash/spot VIX during the same period. With the June contract set to expire at the open of trading tomorrow, it is not surprising that the contract have been as volatile as the VIX index in the last few days. Note that at the other end of the term structure, the back month (February 2013) VIX futures contracts have fallen only 6.8%, about ¼ of the decline seen in the front month futures. Given where we are in the current expiration cycle (right at the very end), the changes in the other months relative to the front month VIX futures are in line with historical norms.

Sharp-eyed readers will no doubt note evidence of the Holiday Effect in the dip in the December contract, where fewer trading days and bullish seasonal factors have a tendency to dampen volatility – and volatility expectations. [Which raises the question of whether the European sovereign debt crisis and the U.S. fiscal cliff will observe the holidays this year, but that is a post for another time…]

The bottom line is that even with the VIX hovering around the 18.00 line, investors are still anticipating a VIX in the 29-30 range for the beginning of 2013. While this may sound high to some, it is down from expectations of a VIX of 31-32 just last week.

One thing I am certain of: there will be a fair amount of entertainment value just in watching the gyrations of the financial markets for the next few quarters. One other thing I am nearly certain of: when the VIX futures make big moves, new opportunities are bound to arise.

Related posts:

[source(s): CBOE, Interactive Brokers]

Disclosure(s): the CBOE is an advertiser on VIX and More

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