In the VIX Complex, It's Always Groundhog Day

Playing Thursday Morning Quarterback after VIX options expiration

by Adam Warner

Published on Jun 18, 2015 at 9:06 AM
Updated on Jun 24, 2020 at 10:16 AM

A belated Happy VIX-piration to all! Unfortunately, it's not likely a happy day for the majority of CBOE Volatility Index (VIX) call players.

In "regular" options, that "percentage of options closing worthless" number can be misleading. It doesn't factor options that the owners already closed profitably; it only counts options left open at the end.

But in VIX, it's a good representation. That's because almost every call out there was out of the money when the order initiated and was never actually in the money. Yes, a trader could still make a profit buying and selling them, even if they're never close to the money. That didn't happen either, though; there was never that big volatility pop to give speculators an easy out. And remember: Time weighs on all options, so even if a trader did catch a small VIX pop, the actual VIX call was probably lower. They're all priced for a quick VIX pop to begin with, so the small pops won't help them much. 

And all sets aside the fact that most VIX calls are bought as either insurance (often for credit markets and not stocks) or cheap spec and are not bought just to flip. Most buyers likely lost on VIX futures, as well. Tough to ever know that for sure, but it's a reasonable assumption, given the term structure almost always looks as it does now:

150618VIX1

All of which begs the question, why? Why do traders/investors always "overpay" for VIX futures and VIX calls? 

I understand that they serve a function as insurance. And insurance companies (in this case, hedgies and traders willing to sell protection) only write policies (sell VIX calls and futures) if they can generate enough premium to offset the occasional claim (VIX pop). So the structure suggests sellers will generally get the best of the price. 

But why does the term structure stay this upwardly sloped? Sure, we're a little flatter than the last couple times VIX sat about here:

150618VIX2

But it's not a lot flatter and it's on top of 5-6 years of almost non-stop VIX speculation pain. And it hasn't stopped VIX call speculation, which we know is at a high. 

When investing behavior does poorly, it tends to change behavior. Prices adjust. That is everywhere except the VIX Complex. It's always Groundhog Day here. 

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

 


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