The Under-Appreciated Weekly $VIX Futures and Options (Preview)

By Lawrence G. McMillan

Many volatility traders – we are among them – complained about the lack of response by volatility derivatives during last fall’s market decline.  That was especially true in the downward thrust in December.  $VIX itself managed to put together a decent move, as it rose from 16 in early December to 36 on Christmas Eve.  But one cannot trade $VIX; only the $VIX derivatives are available for trading.  

The $VIX January futures were far less responsive.  They began December with a premium to $VIX of about 1 point on December 3rd ($VIX was 16.44; Jan $VIX futures were 17.37).  Immediately, as soon as the market began to fall and $VIX began to rise, these futures dropped to a discount.  And that discount just kept getting larger as the market declined.  By December 24th, when $VIX closed at 36.07, these Jan $VIX futures had only risen to 25.90.

The following table summarizes this action, including that of the Feb $VIX futures. $SPX lost 15.7% from the December 3rd close to the December 24th close – 14 trading days (the market was closed on December 5th in memory of President G.H.W. Bush)... 

Read the full article, published on 3/15/2019, by subscribing to The Option Strategist Newsletter now. 

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