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)...
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