How to trade VIX

How to trade VIX you ask?  Over the past week we have had a 12.35 VIX trading to the mid 17’s so there should be plenty of VIX trading to be done.  The reality is that VIX itself does not trade.  The VIX futures trade and most of the liquidity is in the Apr17 and May 22 ordinary contracts.  VIX can move a lot but the futures contracts usually move a lot less.  A lot less.  That is very annoying.

VIX futures constantly discount the VIX cash

 From the blog last week we learned VIX is a 30 day forward volatility but the market is moving today.  VIX pricing is constantly discounting the daily move to sometime in the future.  VIX futures actually try to guess the price of VIX at expiration.  VIX is the price now for 30 day volatility and the VIX futures are the price at expiration.  That means the VIX futures can swing wildly around the VIX cash price.  Usually it swings with in a range based on the time to expiration.

VIX Central

VIX underpriced last week’s move

When  I teach volatility I liken it to Newtonian Physics; a body in motion stays in motion.  VIX is a lot like that.  Last week we had a 2% SPX move but only small pop to a 17 VIX.  That is not a lot considering a 2% daily SPX move is closer to a 32% volatility.  The 30 day VIX discounted a big part of that move.  Almost like VIX DID NOT BUY the selloff.

VIX futures do not stay flat for long

Note the Vix curves I posted.  The red is yesterday’s VIX close and the green line is today’s close.  VIX futures moved only fractionally and VIX cash had a near $2 range from the highs yesterday to the closing low today.  the VIX futures curve was very flat yesterday.  That usually signals an unsure volatility market.  It does not stay that way for long  since VIX keeps rising as the selloff becomes real or the all clear bell is rung.  As of today’s close we are close to a fair contango number and the all clear sign albeit at higher VIX.

A VIX Trade

Contango erodes the vol products like VXXB and the current move higher in VIX means more potential downside as future premiums subside.  I like VXXB to go lower.  Hedging the VXXB premium is relatively inexpensive.

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Disclosure:  VIX, VXXB positions

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