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By Lawrence G. McMillan

The $VIX settlement occurred this morning (Wednesday, 12/21/2011) at the opening.  It was a rather unusual settlement - something we've not really see before.  Yesterday (Tuesday), at the close of trading, $VIX was 23.22, but the December $VIX futures settled at 23.80 – a 58-cent premium.  The two, by definition, converge at the "a.m." settlement at Wednesday's opening.  This in itself is a bit unusual, seeing that large of a premium with essentially no trading time remaining.  But that has happened before and, if there was bad news out of Europe or Asia overnight, we've seen $VIX gap higher the next morning, justifying Tuesday's closing premium.  So traders of the expiring December futures (and options) must have felt, or were worried that, $VIX could bolt higher overnight.

In reality, what occurred was strange.  The stock market opened flat and then traded down about 5 $SPX points.  Normally, one would think that would cause $VIX to rise.  But it didn't.  In fact, $VIX itself, opened at 22.52 (down 0.70 from yesterday's close) and traded lower.  Now, the opening print in $VIX is not the "a.m. settlement price" of $VIX.  Rather, that is comprised of a separate $VIX calculation using only the $SPX January options' opening prices/markets.  

After a long wait, the CBOE finally posted the "a.m. settlement price" at about 11am Eastern time.  It was 21.36!  That was down 1.86 from the closing $VIX on Tuesday, and down 2.44 from the Tuesday settlement of the December $VIX futures.  Moreover, it was 1.16 lower than the $VIX opening print (admittedly, not the same thing, but still a big difference).

As a result, anyone who held short December $VIX derivatives positions (long puts or short futures) made out very well, while those who held $VIX calls or long futures did not.  

The bottom line is that holding all the way into the $VIX settlement process is still a very risky position for traders of $VIX derivatives.  Despite the windfall profit for bearishly-oriented positions, it was high-risk to hold on overnight.

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