OptionsHouse

Options Trading News

April 18, 2013  Thu 9:11 AM CT

VIX: SEE CHART GET CHAIN FIND STRATEGIES
The VIX may have just jumped in the last three days, but volatility in the S&P 500 has actually been rising for the last month.

The VIX is known in the popular media as the "fear gauge," but its real name is the CBOE Volatility Index, and that is what it really is: just a statistic that is derived from the SPX options in the front two months. It gives us an idea of the volatility that traders are expecting in the next 30 days.

The VIX closed Friday at 12. It has since jumped above 17, on Monday and again yesterday. A 40 percent move higher is definitely significant, but the VIX is most closely tied to the actual volatility in the SPX, which has seen a bigger increase. A month ago the 10-day historical volatility of the SPX (measuring the day-to-day past movement) was 5 percent, but today it climbed more than 19 percent for a gain of almost 300 percent.

There are a few ways of trying to take advantage of increasing volatility. We hear people recommend "buying the VIX," though the index is just a statistic, not a tradable entity. You can buy VIX futures, but those have different prices. And the VIX options and exchange-traded funds and notes are all based on those VIX futures.

Usually the VIX futures trade at an increasing premium to the spot VIX, a situation known as contango. But at times of market turmoil, the spot VIX can climb above the futures, which is what we have right now.

While the VIX futures, calls, and exchange-traded funds are usually quite expensive hedges on long equity positions, it is times like these that they become quite appealing. Yes, the data means that traders expect the spot VIX to calm down to the level of the May futures in the next month, but research has shown that the volatility index typically does a better job than the VIX futures in predicting where volatility will be going forward.

Volatility comes in waves, and it has been building in the actual volatility of the SPX of the last month and in the VIX in the last three days. I can't say when this wave will recede, but I do know that it makes sense to be prepared for more.

Using the VIX products usually has a negative expectation, but when the volatility index is above the futures, it becomes a very appealing trade.

(A version of this article appeared in optionMONSTER's Advantage Point newsletter of April 17.)
Share this article with your friends


Related Stories

VIX

Video: Call buyers ride pop in VIX

July 27, 2015

With the spot volatility index jumping well above 15 today, Group One's Jamie Tyrrell says VIX call buyers are targeting the 20 strike in August and September.

VIX

Video: Steady buying in VIX calls

July 24, 2015

With the market down again today, Group One's Jamie Tyrrell says traders are snapping up calls in August, September, and October.

VIX

Video: August VIX calls pick up

July 23, 2015

Group One's Jamie Tyrrell says traders are buying VIX calls again today, with the largest purchase in the August 18 contracts.

VIX

Videocast: July VIX settles at 12.82

July 22, 2015

With this morning's July expiration out of the way, Group One's Jamie Tyrrell says traders are buying the VIX August 18 and 22 calls.

VIX

Videocast: 'Mind the gap' in VIX

July 21, 2015

Group One's Jamie Tyrrell says the gap between VIX options and futures is closing ahead of tomorrow's July settlement, with contracts converging above the 12.50 level.

OptionsHouse

Premium Services

Archived Webinar

Education & Strategy

Options Academy: Put/Call Parity

Once you have learned and understood the concepts of Synthetic Positions and Reversal/Conversion, you have mastered the idea that options are truly mathematically based...

View more education articles »