VIX not going down any more

[sf631]

A quick follow-up for this futures contract, which I've been watching with interest.

At 4p ET today (expiration date) the January futures contract is still trading 25 bps above the spot, though during the day today spot rose +130 bps vs -10bps for the January contract. Spot VIX rose in spite of slightly positive close on the SPX, which generally suggests downward movement in volatility.

So, two conclusions and a question:
1) the spot and future do tend strongly towards convergence
2) in this case it was the spot that moved to meet the future, so either someone is goosing the spot through the SPX options market or the futures market expects volatility to rise going into settlement date.
Question - is there a simple way to take advantage of future (no pun intended) setups like this, with a hedged position, since simply going short the Jan futures contract would not do the trick?

If one were to go long volatility with an assortment of January expiry options on the SPY ETF, would that pretty closely approximate the option strip that drives calculation of the VIX?

I'll go read the white paper on how VIX is derived, but any quick words of warning about how I'm looking at this?

Many thanks in advance

 

[tenthousandmen]

It is possible for the VIX to go up in a bull market - however this probably isn't what is going on: http://en.wikipedia.org/wiki/VIX

 

[newwurldmn]

Quote from sf631:

A quick follow-up for this futures contract, which I've been watching with interest.

At 4p ET today (expiration date) the January futures contract is still trading 25 bps above the spot, though during the day today spot rose +130 bps vs -10bps for the January contract. Spot VIX rose in spite of slightly positive close on the SPX, which generally suggests downward movement in volatility.

So, two conclusions and a question:
1) the spot and future do tend strongly towards convergence
2) in this case it was the spot that moved to meet the future, so either someone is goosing the spot through the SPX options market or the futures market expects volatility to rise going into settlement date.
Question - is there a simple way to take advantage of future (no pun intended) setups like this, with a hedged position, since simply going short the Jan futures contract would not do the trick?

If one were to go long volatility with an assortment of January expiry options on the SPY ETF, would that pretty closely approximate the option strip that drives calculation of the VIX?

I'll go read the white paper on how VIX is derived, but any quick words of warning about how I'm looking at this?

Many thanks in advance

If you could cost effectively and balance sheet effectively synhetically create the VIX, you can't manage your basket of options against the settlement of the futures. So you would be running risk. Additionally if you are trying to spread the spot vix vs the future, you won't be able to trade the option basket roll easily. Also you will be taking gamma/theta risk which isn't explicit in the VIX calculation.

 

[newwurldmn]

Quote from zdreg:

it should even itself out over time.

Depends on if dealers have some structural position (like clients buy vix as a hedge and dealers are generally net short).

I don't know if that is the case.

 

[sle]

Quote from zdreg:
it should even itself out over time.

well, and it certainly does (special opening quote print minus previous days averages to 9 bps since 2006), but you are pretty exposed during the expiration. I, in general, try to liquidate all of my expiring option/futures the day before cause there is no edge is trying to guess what the expiration will be.

 

[sle]

Quote from sf631:

Question - is there a simple way to take advantage of future (no pun intended) setups like this, with a hedged position, since simply going short the Jan futures contract would not do the trick?

given that most of the movement of spot vix is due to the movement of the spot along the skew, you can just buy/sell futures against the delta hedge. Not exactly a "true" riskless arb, though.

 

[Jerkstore]

Quote from Maverick74:

Yes, but the problem is, it's a single print that never really trades. Like SPX, it uses a combination of strikes on the open when they happen to create a synthetic price. You won't actually see "that" price on the cash VIX because it's not static. So you could see the VIX settle up or down 2 or 3 handles from Tuesday's close and the cash VIX might hardly budge. It's a crap shoot.

This isn't true. The vix futures never converge with vix cash. The vix expiration price uses one expiry from the SPX, whereas every vix cash quote will use a combination of 2. Also the vix expiration price is almost always based on an opening strip trade in the SPX, whereas the vix cash is ALWAYS based on the midpoint of the markets.

I can pretty much guarantee that the CBOE stopped trading vix futures till 8:15 on expiration morning (as they did last month and only last month) due to the fact that the vix futures closed at 8:15 trading around 23.75, but the expiration price from the 8:30 print was 21.36 (I forget the exact number). This is a huge fucking difference, but it can happen.

 

[Jerkstore]

Quote from sf631:

A quick follow-up for this futures contract, which I've been watching with interest.

At 4p ET today (expiration date) the January futures contract is still trading 25 bps above the spot, though during the day today spot rose +130 bps vs -10bps for the January contract. Spot VIX rose in spite of slightly positive close on the SPX, which generally suggests downward movement in volatility.

So, two conclusions and a question:
1) the spot and future do tend strongly towards convergence
2) in this case it was the spot that moved to meet the future, so either someone is goosing the spot through the SPX options market or the futures market expects volatility to rise going into settlement date.
Question - is there a simple way to take advantage of future (no pun intended) setups like this, with a hedged position, since simply going short the Jan futures contract would not do the trick?

If one were to go long volatility with an assortment of January expiry options on the SPY ETF, would that pretty closely approximate the option strip that drives calculation of the VIX?

I'll go read the white paper on how VIX is derived, but any quick words of warning about how I'm looking at this?

Many thanks in advance

The phenomenon you are witnessing is due to the actual time of the vix calculation vs the trading day time used by options market maker to price spx options. Thus, that difference is not tradeable, and is more pronounced going into a longer weekend.

As far as your option strip idea...atticus is correct in that the options have gamma and theta, whereas the vix futures are simply a best bet as to the vol (as per the vix closing calculation) of the spx options strip. Vix futures are a crude estimate of expiring volatility, but dont replicate the rest of the option risks.

I suggest you look through the vix trade types in the CFE rules website though. There is a tradetype wherein you may swap vix futures for a strip of spx options (this is a very similar trade type to the strip used to calculate the vix expiration value-- It's not exactly an EFP trade, but I have seen CBOE stats refer to this as a VIX EFP trade.) I think there may be a limit in the size you may trade, and I have never done this trade myself. If intersted I'll go find you a link.

 

[Maverick74]

Quote from Jerkstore:

This isn't true. The vix futures never converge with vix cash. The vix expiration price uses one expiry from the SPX, whereas every vix cash quote will use a combination of 2. Also the vix expiration price is almost always based on an opening strip trade in the SPX, whereas the vix cash is ALWAYS based on the midpoint of the markets.

I can pretty much guarantee that the CBOE stopped trading vix futures till 8:15 on expiration morning (as they did last month and only last month) due to the fact that the vix futures closed at 8:15 trading around 23.75, but the expiration price from the 8:30 print was 21.36 (I forget the exact number). This is a huge fucking difference, but it can happen.

I never said it converges.

 

[Jerkstore]

Another observation: the vix futures closing prices ALWAYS get monkeyed with by the vxx and other vix etf managers rebalancing their risk baskets. The Jan future closed .15 to .2 lower than it should have.

If you notice, the front month vix future almost always closes .50 to $1 above the closing vix cash on Tuesday before expiration. As best as I can tell, this is the vix trading community playing the very unique vix expiring print game. Vix expiration value has been monkeyed higher into expiration prints as of late, with the single huge exception of last month where the expiration value was a full 2.5 points LOWER than the futures price 15 minutes beforehand.

VIX expiration is such a redicilous game. It's amost completely random risk, which I generally hate. We are risk averse, and my position may fluctuate by 200 to 300k due to the vix expiration mark-- I wish I were kidding.

Happy trading.