Volatility Index Futures


vix logo

Volatility Index Futures are definitely in the limelight at this point of time. As you can see from the chart below, volatility is still the rage in the market place.

Monday saw the Dow down 258.08 points, the S&P500 down 32.19 points, and the Nasdaq down 79.57 points. Tuesday saw a major reversal in late afternoon trading to bring the major indices into positive territory, with the Dow gaining 153.41 points, the S&P500 with a gain of 24.72 points, and the Nasdaq gaining 68.99 points.


Suffice to say, the volatility storm has yet to subside. With the S&P 500 (SPX) officially in bear market territory, CBOE Market Volatility Index (VIX) futures are now trading at post "financial crisis" highs.


The front month VIX future (currently Oct 11) last traded above 45 on December 29, 2008 having peaked at 67.95 on November 17, 2008.

Given the magnitude of the recent move, a little perspective may be in order. As the graph below shows we are significantly above the average levels for each serial future, but we remain meaningfully below the highs set during 2008.

vix-serial futures

The current volatility index futures forward curve is mostly in backwardation, while the December VIX future remains at a discount to both the November and January volatility index futures, as the short end of the curve has continued to rise the greatest, backwardation has increased across the curve.

vix-futures-forward curve

Notably, the longest dated futures have been less responsive than in the 2008 period, supporting the belief that as volatility markets develop, traders are likely to price volatility differently than in the past.

At this point, the conclusion is simple. If things get much worse for the market, there is room for Volatility Index futures to rise. However, if conditions improve, VIX futures are well above the long-term averages.

vix prices to spx returns

Action to Take

Equity investors who have diversified with a volatility asset such as a VIX future should continue to reduce the volatility position to match their target allocation. With the current backwardation in the curve, this reduction can be partially accomplished by rolling into the next serial future when the curve steepens.

Traders should remain agile, with positions small and short-term.

While the November - December spread has increased as it shortens in duration and the curve remains steeply backward, although the risk/reward remains attractive, the time for the spread to decline is shortened. Consequently selling the January VIX and buying the February VIX for a credit is now the more attractive spread trade.

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