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Jay Wolberg
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I'm an independent stock trader specializing in volatility products. I am the founder of Trading Volatility which provides financial data services focusing on volatility derivatives and capital structure arbitrage. My educational background includes a B.S. in Electrical Engineering from the... More
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  • March VIX Futures Expiration Date And A Suppressed VIX 4 comments
    Mar 8, 2013 1:07 PM | about stocks: VXX

    It's one of those unusual months for VIX where there are 35 days between monthly options expiration day instead of 28 as March options expire on the 15th and April options expire on the 19th. This means that March VIX futures don't expire until the 20th this month, since VIX futures always expire 30 days before the next month's options expire. If you don't like counting you can always find a calendar for VIX futures expiration here.

    This extended month also causes some issues with the value of VIX during the next week when calculating its constant 30-day volatility.

    VIX is calculated using weighted values of near-term (VIN) and next-term (VIF) options of the S&P 500, with near-term options having at least one week to expiration (values can be found on the CBOE's page). Once options expiration is less than a week away VIX rolls to use the next term's values as the new near-term value, weighting the new VIN with a value of 1 and the new VIF with a value of 0. As the month progresses the value of these weights shift toward VIF until the next expiration when VIF has the weight of 1 and VIN has the weight of 0.

    For example, if you look at the value of March and April values on the CBOE's page you will see that current values are 10.47 and 12.71, respectively. Looking at VIX today you will notice that it is essentially equal to the April VIX value (this should not be confused with April VIX futures).

    Since options expire next Friday, VIX must use April and May as VIN and VIF values. However, since both April and May expiration are more than 30 days away, the near-term weight is greater than 1 and the next-term weight will be negative.

    Specifically, on Monday April will have a weight of 1.25 and May will have a weight of -0.25. From there the roll continues as usual with weights shifting a little bit each day (on Tuesday the weights are 1.2 and -0.2, then 1.15 and -0.15 on Wednesday, etc.).

    As an example using current values of April and May of 12.71 and 13.76, come Monday VIX will be calculated by (1.25)*(12.71) + (-0.25)*(13.76) = 15.89 - 3.44 = 12.45. You'll notice that the VIX here is actually less than both VIN and VIF, which seems abnormal but is not unusual during these weeks. Sometimes this results in a temporarily suppressed VIX, especially when the next-term month is priced substantially higher than the near-term month.

    For more information on how the VIX is calculated see the CBOE's VIX white paper.

    Themes: XIV, UVXY, VIX, ETFs Portfolio Strategy Stocks: VXX
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Comments (4)
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  • Carl Cachia
    , contributor
    Comments (423) | Send Message
     
    will this affect option calls on vxx?
    thnks
    9 Mar 2013, 09:50 PM Reply Like
  • Jay Wolberg
    , contributor
    Comments (41) | Send Message
     
    Author’s reply » Afraid I don't have the answer to that one, Carl. I haven't studied options on VXX enough.
    12 Mar 2013, 09:26 PM Reply Like
  • bobbyo_85712
    , contributor
    Comments (2) | Send Message
     
    Great article! Wondering about trading method you use and what instrument. Arbitrage on the derivatives because of contango? Will share article. Thanks.
    12 Mar 2013, 05:13 AM Reply Like
  • Jay Wolberg
    , contributor
    Comments (41) | Send Message
     
    Author’s reply » Thanks. The conditions over the past few years have been ideal for a short VXX/long XIV trade due to the roll yield from the contango term structure.

     

    At this point, with VIX and futures at multi-year lows and the term structure relatively flat I find it to be a good time to scale back positions or exit completely and wait for a vix spike to enter a new trade.

     

    For more info on the topic you can visit my blog at http://bit.ly/14UiLo8.
    12 Mar 2013, 09:25 PM Reply Like
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