Making a Case for Even Shorter-Term VIX Futures

Shorter-term VIX futures will track exponentially closer than current volatility products

Jul 23, 2015 at 9:49 AM
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We saw a kind of ugly open yesterday, after a dip on Tuesday, further supporting the theory that we are never going to break out of this S&P 500 Index (SPX) range this year. Thank you, Apple Inc. (NASDAQ:AAPL).

But hey, there's some good news if you like volatility products and like the ability to trade vol after hours. We now have weekly CBOE Volatility Index (VIX) futures! From CBOE Options Hub:

"CFE plans to list futures with weekly expirations on the CBOE Volatility Index®(VIX) beginning at 3:30 P.M. CT on Wednesday July 22 (this is the beginning  of the July 23 trading day), subject to regulatory review. VIX Weeklys options at CBOE are expected to follow on a later date, also subject to regulatory approval." 

Because hey, why not? I mean that seriously. Why not list everything you can?

One of the complaints about vol products is that they don't actually track VIX closely enough. But you can solve that to some extent by either going larger in quantity or shorter in duration. But alas, that "shorter in duration" option only exists later in the monthly cycle. At least, until today. 

CBOE has an interesting chart on the subject. Here's the beta of VIX futures expressed by days until expiration:

150723Warner

 

The beta for 33 days is 0.39, but as you can see it rises exponentially as expiration nears. It gets to about 0.5-0.6 with a week to go, and peaks at 0.79 with a day to go. 

And that leads me to a question that sounds like a joke, but is totally serious: Why don't we list 1-day VIX futures?

There's kind of a holy grail out there of trying to find the best way to trade "spot" VIX. Monthly VIX futures came first, but the reality is they just let you bet on where traders expect to price 30-day implied volatility from some date "X" days in the future. Plus, they're not actually a stock, so some are precluded from using them. 

Enter iPath S&P 500 VIX Short-Term Futures ETN (VXX), a stock that sounded like VIX! Unfortunately, it's just a 30-day future disguised as a stock and… Well, you know the rest. And remember AccuShares Spot CBOE VIX Fund Up Shares (VXUP) and AccuShares Spot CBOE VIX Fund Down Shares (VXDN)? Those haven't worked out either, unless you want More VXX!

So enter shorter-term futures. They're not exactly VIX, either, for the same reason longer-dated futures are not actually VIX. Plus, they're futures and not stocks. But as the chart shows, they will track exponentially closer, which at the end of the day is what the masses want.

What's the harm in listing VIX futures every couple of days? It would afford the chance to really tailor the VIX bets at all times. And frankly, that's how we should all "trade" VIX. Timing is everything. We've heard about how low VIX has sat for pretty much forever -- or at least five years. Lots of money is lost trying to catch the "inevitable" longer-term VIX rally that never comes; maybe we can emphasize shorter-term VIX bets? And what better way to do that than always have really short-term VIX paper out there?

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


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