How 'Smart' Are VIX Futures?

Futures on the CBOE Volatility Index (VIX) offer short-term clues, but not much long-term clarity

by Adam Warner

Published on Nov 18, 2015 at 9:36 AM

As the market opened up small Monday, and the CBOE Volatility Index (VIX) dipped ever so slightly, one of my Twitter people made an interesting observation.

At the time, futures were giving up the ghost way faster than VIX itself. And it proved pretty prescient, as the market went north and VIX itself finally started to give back some recent gains.

Of course, it's VIX expiration week … regular VIX, I mean. The November monthlies expire on today's opening rotation. I don't believe VIX futures are always "smart," but those bunnies do have good noses as to how that opening run-off will play out.

As to futures in the bigger picture ... well, not so much. They always expect a lasting VIX rally. We get our VIX blips. We're ebbing off one of said blips as I type. But further out on the curve, the futures almost never get it close to right. But hey, if you disagree, there's a decent VIX rally on tap over the last eight months!

151118Warner1

I do agree that VIX will go north of 20 again sometime between now and June. I also believe we're transitioning to more of an "up" longer-term VIX regime. But that doesn't mean I'd buy VIX futures up to 20. I have better odds in daily fantasy sports than I do guessing the timing of VIX strength that far out.

It's interesting to note that there's still some residual apprehension in VIX futures. Here's the term structure on Aug. 20, just before the serious market dip, vs. term structure now and on Oct. 12, another date with a similar spot VIX.

151118Warner2

We're considerably more elevated than back in August, and somewhat more elevated in the nearer cycles than we were in October. I'm not going to say fear is enormous, but it's clearly out there.

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


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