Volatility: VIX Breaks 30 for Third Straight Day

By Mike Yamamoto

The volatility index pushed back above 30 for the third day in a row earlier today, and traders continue to question the behavior of the S&P 500 VIX Short-Term Futures (VXX) exchange-traded note.

The VIX was right at that 30 level as the S&P 500 climbed out of the hole it was in pre-market. It has since pulled back slightly to 29.88, still up 0.34 percent on the day.

The recent market action has pushed the 30-day historical volatility up to 20 percent, but clearly the VIX continues to price in far more volatility than there actually is.

The VIX futures are mixed, with November and December flat around 28 and the 2010 futures up around 1 percent but also in the 28 range. Yesterday confused some traders as the SPX ended up 0.65 percent, the VIX was down 3 percent, but the VXX was up.

The VXX has been much maligned of late because it does not do a very good job of tracking the VIX--and it doesn't, of course, because it tracks the futures as its name indicates. But as Don Fishback recently pointed out, it doesn't do a very good job of that either, as the VXX is constantly rolling out in the front two months. The normal "term structure" means that this is a losing proposition.

But when the VIX is above the VIX futures, as it is now, then the VXX becomes a great way to play a further pop in volatility. The VXX is based on the futures trading at 28, and the VIX is above 30. The futures are pricing in a lower VIX, but if the VIX continues to climb, the VXX will actually outperform.