Why the Upcoming VIX Dip is Meaningless

Don't read too much into a Thanksgiving-week dip for VIX

Nov 20, 2015 at 9:16 AM
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I had one further thought on the CBOE Volatility Index (VIX) Expiration Games of Wednesday. Having the whole VIX put board trade serves to bump VIX marginally higher throughout the entire trading day, not just the open. Obviously, the ostensible purpose is to impact the cashout price. But the effect remains all day.

All the way out-of-the-money (OOTM) put series carry an extremely high implied volatility. They are all worth 0, but if they're quoted at 0 bid, 5-cent offer, they go into the calculation as "worth" 2.5 cents. That's an enormous implied volatility.

On the other hand, they are all way away from the money, so they don't carry much weight in the calculation. But add them all up, and it's "not nothing." It's going to bump spot VIX up on expiration day, ever so slightly.

And then the next day (Thursday), when VIX goes back to normal, it will lose that modest bump. It will manifest as underperformance … and probably set off alarms somewhere in the tinfoil reaches of Twitter. It's tough to quantify, in that there's lots of moving parts in any given day and the effect is probably on the small side.

It's important to note that VIX itself artificially printing a little high and then subsequently reverting does not have any monetary implications. Remember, the VIX itself is just a calculation. It proxies implied volatility. It's important to differentiate that from the tradeable VIX universe, where these S&P 500 Index (SPX) put order games do in fact have monetary implications. And as we noted yesterday, that's not VIX, that's VRO.

It also highlights a point we mention from time to time: VIX is never perfect to the penny. There are expiration quirks like these; there are quirks around news flow as well. Options often get bid up into known events like Fed meetings, and then often sell back down after the news is out. And there are calendar quirks -- as in, no one loves owning options and paying time decay into weekends and holidays.

And that reminds me … we're about to hit Thanksgiving week! If the most exciting news is anticipating one-hour's worth of Black Friday anecdotal shopping tales, then there's nothing much going on that's going to impact implied volatility. In fact, that's almost always the case; it's a very slow news week punctuated by what's basically a four-day weekend. It's highly likely VIX will dip over the next few sessions, and it's not likely predictive of anything related to volatility coming out of the break.

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


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