Volatility popped on Friday with the stock market’s move lower. Concern about China, uncertainty in Europe and perhaps, more thought about George Soros’ comments helped the market breach its 9-Day Moving Average support line. Fortunately, the market closed well off the lows of the session. This sell-off created a VIX (CBOE Volatility Index) rally due to Implied Volatility increases in Stock Indices which almost always occurs in a Stock Market sell-off.
The cash VIX, at Friday’s close at 4PM ET, was up more than 16% on the day. The VX (CBOE Volatility Index VIX Futures) each rallied a varying degree depending on the month you were interested in. This is shown in the Table below. The VIX Futures price fluctuates based on the options contracts of the SPX for their individual months. Therefore the measurement of the value of the VIX Futures is based on various options series in the SPX (S&P 500 Index Options). The Table shows the pricing curve of VX Futures. While a 16% increase seems dramatic, the price of the underlying contract is low and evaluating the move as a percentage may be a bit misleading. Each trader with an options position will have to determine just how meaningful it is.
There a couple of ways to trade the VIX. One is to trade the Calls and Puts on the Index and another is to trade the CBOE Volatility Futures Contract (VX). The front month VX Futures Contract, which trades most of the volume for the contract, typically has five tic wide markets. The volume in the Futures Contract was more than 150,000 on Friday. This makes the Liquidity of the Futures Contract excellent for Trading. The VIX Options, however, traded in excess of 700,000 contracts and also has a minimum Bid/Ask Spread of five points. The difference is that while the futures has a five point Bid/Ask Spread on a seventeen plus dollar contract, or significantly less than one third of one percent, the Bid/Ask Spread in the Options Contracts is significantly wider.
The Table below shows some of the options trading information from just before the close on Friday. It provides significant information about the activity of the June and July VIX Options. On the left hand side, on the top, is the Cash VIX Price and next to the June and July Options Contracts is the corresponding value of the VX Futures price. This enables you to see which options contract is in and out of the money. I have highlighted the out of the money Bid and Ask Prices. On the right hand side is the percentage differential in the Bid/Ask Spread of all of the out of the money Options listed. Liquidity is essential for making money in the long-term. It seems to me as though the VIX, with the tremendous volume that it trades, should be trading in penny wide increments. Any time a market provides additional liquidity, the market gets better and the participants reap the benefits. In addition, volume frequently increases which is excellent for the participating Exchanges.
Successful Options Trading involves understanding the effects of Liquidity, Historical and Implied Volatility, the Implied Volatility Skew and choosing the right Options Trading Strategy to meet your goals. Take a look at our Options Syllabus and one of our Options Trading PowerPoints. Contact us if you could benefit from a One on One Options Training Session by Webinar.
Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results.