The New Way to Trade Short-Term VIX Moves

The CBOE launched weekly VIX futures just weeks before a big volatility spike, and will launch VIX weekly options next month

by Adam Warner

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

By definition, there's always a lag between when some organization cogitates a new trading product to when it actually hits our screens. You need to test it, get it approved, market it, et al. Ergo, it's literally impossible to know how the marketplace will look when it actually launches.

Having said that, I realize that the Chicago Board Options Exchange (CBOE) didn't know anything when they listed CBOE Volatility Index (VIX) weekly futures. But, wow, could they have timed them any better? This, from Matt Moran:

    "VIX® Weeklys futures began trading at CBOE Futures Exchange (CFE®) on July 23, 2015. VIX Weeklys options are expected to begin trading at CBOE® on October 8, 2015. One of the most important features of the new VIX Weeklys is the fact that these products have the potential to provide more trading precision and responsiveness for investors.

    "Note in the first chart ... that the VIX Weekly futures (Wk 34, expiring on August 26) generally were much more responsive than the VIX futures with standard expiration in September and October. In the three trading days ending on August 24, the S&P 500 Index fell 9% and the VIX Weekly futures (Wk 34) rose 147%."
The iPath S&P 500 VIX Short-Term Futures ETN (VXX) closed at 16.29 on July 23, amidst a drift to its all-time low of 15.48 a couple weeks later. It reached an intraday high in this move of 31.48 on Sept. 1, so basically, a double in about three weeks.

VXX proxies a 30-day future, while the weeklys are obviously much shorter in duration. And indeed, the closer in time to expiration, the more responsive it will be to moves in the actual VIX.

To me, short-dated futures are the best way for virtually anyone wanting to "bet" on VIX moves. I mean, if you're running some sort of variance portfolio, and need paper of certain durations, then yeah, long-dated might work for you. But, for the 99.9% of us not in that camp, we're looking to either protect a portfolio against a volatility spike, or speculate on one as a short-term trader.

Well, as far as portfolio protection goes, VIX paper does not work very well. Longer-dated futures have spent the vast majority of their existence at premiums to VIX, and those premiums generally evaporate over time (rather than VIX rising up and beyond the futures). There are exceptions -- like these last few weeks for example -- but, generally speaking, holding "time" in VIX doesn't work. VXX, of course, works spectacularly poorly over time. Despite the recent double, it's still down 99.5% since inception 6.5 years ago.

Short-dated futures -- now constantly available via VIX weeklys -- make way more sense as a trading and/or spec play, in my humble opinion. And, let's face it, that's most of what we want to play. If you're "buying" VIX something now because you believe VIX will be higher in half a year then, well, you're most likely in for some disappointment. You might catch it, but what's way more likely based on past VIX-story is that it's just not going to happen.

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

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