Enjoy the VIX Vacation While It Lasts

How the holiday season affects the CBOE Volatility Index (VIX)

Dec 29, 2014 at 9:05 AM
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It's mid-holiday time, so it's time for our annual Christmas/New Year's-Festivus Holiday Reminder: Don't pay enormous attention to the CBOE Volatility Index (VIX) right now, as it may not paint a terribly accurate picture of volatility expectations for another week or so. That's because VIX indexes the implied volatility (IV) of actual S&P 500 Index (SPX) options. And those actual SPX options have actual expiration dates and fluctuate in price thanks to other variables besides volatility. Those variables are all "fixed," but one of them, time, is often not as fixed as meets the eye. In other words, some "time" is worth more than other "time."

Consider "Case A," a three-day option over any random time frame, vs. "Case B," a three-day option that includes a weekend. A volatility calculation assumes that time is fixed and three days is three days, but clearly the IV in Case A would appear greater than the IV in Case B. But it's really just that the option covers a more desirable time stretch in Case A than Case B. No trading likely means lower volatility. The only chance it won't is if there's a big gap on a Monday open, and that's a low-probability event.

This two-week holiday stretch is like one big, long, weekend holding period. Yes, it's possible to see some gaps, especially with all these stops and starts to the trading weeks. But it's not likely, given that it's a low-volume, slow trade to begin with. In VIX terms, that means that it will most definitely sit lower than it would in a normal stretch. Volatility expectations going forward may actually be higher.

Then again, maybe not. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) proxies VIX futures, and that doesn't have the same holiday (or lack thereof) cheer. And VXX has drifted lately. Rest assured, though, VIX futures always anticipate a future VIX lift -- and that hasn't changed (click chart to enlarge):

VIX Futures Term Structure

The VIX is dead. Long live the VIX.

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


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