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How Much Should We Expect the VIX to Move?

Friday, March 10th, 2017 | Vance Harwood

Every couple of months it seems like there’s an uptick in articles about the CBOE’s VIX Index being broken or manipulated.   Generally I expect the percentage moves in the VIX to be around a factor of 4 in the opposite direction of SPX (S&P 500).  But there are significant eccentricities in the VIX that I factor in, for example Fridays tend to be down days, Mondays tend to be up.

The chart below shows the percentage moves at close for VIX (blue bars) and SPX (red line) for the first 12 trading days of November 2012, along with my -4X rule of thumb (green bars).  The black ovals show 5 days where the VIX went opposite the expected direction. In addition, on two days, the 1st and the 16th the VIX moved far more than a -4X factor.

One of these days, the 12th, has at least a partial explanation.  That was the day that the VIX calculation shifted from using November / December SPX options to December / January options.   If you’re interested see Bill Luby’s post for more information on this phenomenon.

I did an analysis of SPX and VIX since 1990 to see the actual historical ratios between their percentage moves.   I excluded daily SPX percentage moves of less than +-0.1% because they often give very high, nonsensical ratio values.

The average ratio value was -4.77, but as you can see there is a wide spread.   About 20% of the time the ratio is positive (data to the right of the red line).

Each of the blue bars in the histogram shows how many days had a VIX% / SPX% ratio in each 0.25 wide bin.  For example, there were 120 days where the ratio was between -3.25 and -3.5.   I also plotted a normal distribution—which shows this distribution is more concentrated and has wider tails than a Gaussian distribution.

While not broken, and probably not manipulated, the VIX as a fear gauge leaves a lot to be desired.   Given its past performance it’s not reasonable to expect it to negatively correlate with the S&P 500 every day.  However, I think it does give us a very good feel for the mood of the SPX options market.  A single SPX option has the leverage of a $200K+ investment in the S&P 500, so it tends to be the domain of professional / institutional investors.  They aren’t always right, but they aren’t dummies, and they’re voting with their wallets.   Last week they were trading as if they thought the market decline was over, and at least for today, it looks like they were right.

The VIXs of Christmas Past

Monday, July 24th, 2017 | Vance Harwood

One of the persistent characteristics of the CBOE‘s VIX® index is the Christmas Effect—the tendency for VIX to drop down to relatively low levels during the Christmas holidays.  The CBOE’s VIX volatility December futures predict this drop for months in advance, and it has come to pass again this year.   I am aware of at least three possible explanations for this:

  1. Option market makers and others short options reduce their prices before the holidays so that they don’t get stuck with time decay (theta) during the multiple days off
  2. Traders in general go on vacation the end of December, volume drops, and the market becomes lethargic, reducing volatility
  3. People expect volatility to decrease, trade accordingly, and it becomes a self-fulfilling prophecy

I am skeptical about calendar based trading strategies (e.g., “crash prone” October was +8.5%, -1.8%, +4%  2011 through 2013) but the Christmas effect has been persistent— perhaps because it’s not easy to profit from it.   The VIX index itself is not investable, and the December VIX futures already discount the effect.

I was curious  how the VIX behaved over the last few years in December and January, so I generated the chart below using VIX historical data from the CBOE.


To make the chart more readable I carried over closing values over weekends/holidays and used a 3-day moving average.  I excluded 2008, even though it shows the Christmas effect because the market that year was clearly in an unusual state.

There does seem to be a fairly consistent low around the 23rd of December and the VIX has consistently increased right after that—at least for a few days.   By mid-January things seem to have settled back into their random ways.

I also wondered how VIX futures behaved around the holidays.     I used my VIX futures master spreadsheet  to generate the chart below showing the behavior of the front month VIX futures, the next ones to expire.

With the VIX futures the December dip comes a few days earlier.

In my experience, the future is often uncooperative in repeating the past, but this VIX Yet to Come, looks like a reasonable bet for a post-Christmas boost.

Volatility contango—from the beginning

Tuesday, November 8th, 2011 | Vance Harwood

Bill Luby, of VIX and more, recently pointed out that the 1st / 2nd month volatility futures had recently set a record (now 70 days) for continuous time spent in backwardation—where the value of the 1st month is higher than the 2nd month.   Not just a trivia question, this condition has been feathering the pockets of those holding volatility ETNs like VXX / TVIX, and picking the pockets of  those holding inverse volatility ETNs like XIV and SVXY.   Is this backwardation record a harbinger of structural changes in volatility futures, or is it just the normal response to a market correction?

Just visualizing the history of contango, starting when volatility futures started trading in March of 2004  is not an easy task.  It has two dimensions of time: the term structure of the volatility futures on a given date, and the variation of that term structure over time.  Obtaining the raw data itself is not trivial.  The CBOE provides volatilty futures data back to March 2004 on their web site, but it is in the form of 95 (!) different spreadsheets, and it is incomplete because not all months traded for the first several years.  To get a full data set back to 2004 required a considerable amount of interpolation / extrapolation.  If you are interested in obtaining the spreadsheet that consolidates all this data see this post.

The graphs below focus on the front two months of volatility futures.  The first covers from 2004 to the present.  I have quantified the contango as the percentage difference between the 1st and 2nd month, with the 1st month being the reference.  Negative values indicate a contango state, positive indicates backwardation.

VIX and 1-2 month volatility futures compared, with contango, click to enlarge

A couple things jumped out at me when I saw this graph. First of all, at a 10,000 meter level, first month volatilty futures do a good job of tracking the VIX index.  Certainly they don’t track well during the most volatile periods of VIX, but during the quiet times they are within a few points.  Second, the other than few days in Dec 2008/Jan 2009 the 1st and 2nd month futures were in contango for a long time (128 days) during the 2008/2009 bear market.   Not surprisingly, the graph shows that most of the time, volatility futures are in contango

This next graph zooms in on our current situation, starting in July 2011.

Fall 2011 Contango, click to enlarge

In the Fall 2011 correction the futures lagged the VIX, but more recently have caught up.  The  2nd month futures usually lag both the 1st month futures and VIX.

At least for 1st and 2nd month futures the term structure seems to be behaving like it did in the past.     Next I’ll look at the medium term ( 4 to 7 month) futures to see how they have behaved.

Is XIV behaving correctly?

Saturday, March 11th, 2017 | Vance Harwood

In spite of its name, XIV is not the inverse of the VIX index—it is the daily percentage inverse of an index called SPVXSP, which you can monitor on Bloomberg here.  This index very closely tracks the same index that VXX uses, SPVXSTR.

Last week XIV did not track VXX’s daily moves particularly well.   There has been a lot of speculation about what was causing this disruption—ranging from turmoil in the futures markets, XIV’s daily re-balancing, to the heavy backwardation in the soon-to-expire August volatility futures.

Below I have ploted VXX and XIV against the values they should have based on the index:

VXX & XIV vs SPVXSTR, click to enlarge

Things do not look seriously out of wack.  Most importantly, we aren’t seeing a divergence between the index and the VXX/XIV prices.  Daily errors are being compensated for over time. The next graph shows the daily VXX/XIV divergence from the index in percent.   The interesting thing here is that VXX is having trouble tracking too—it’s just in the positive direction.

VXX and XIV tracking error, click to enlarge.

Looking at these graphs I’m inclined to say that the tracking problems are not specific to XIV, but rather due to the volatility/disruption of the futures market associated with the S&P downgrade.

Buy on rumor, sell on news

Tuesday, August 2nd, 2011 | Vance Harwood

I was very surprised Monday morning when sentiment turned around and the market went into decline.

Perhaps people were nervous that the House wouldn’t approve the budget proposal, but it seems more likely mixed economic news prevented any sort of euphoric  reaction, or people realized that an agreement to add another trillion or two of debt really isn’t cause for celebration.

I held onto my $24 September VXX puts, but I sold out the XIV positions that I bought in the low 15s on Friday.   I would have done better to sell at opening, but I still made a good profit.