Trading VIX Warning

As mentioned ad nauseum here, the VIX is at a decent discount to VIX futures and options, although less so after this morning. And remember that is the only VIX you can trade.

So keep in mind if you see the cheapo VIX on the board and fade it on the long side, remember that you are not buying it as low as you may think. Bill at VIX and More runs a snapshot of VIX futures from Friday, and if you click thru, you’ll see that all the futures beyond September are priced in the 22-23 range. In other words, let’s say you buy some VIX calls or VIX futures, and see the cash VIX pop. It’s highly likely you won’t see much of any appreciation in your calls/futures.

Why is that?

Part is what we’ll call calendar reversion. The *cash* VIX loses some steam ahead of holiday’s/weekends as traders lower bids to account for their weekend/holiday decay. And part is simple mean reversion. Remember that VIX/futures are snapshot estimates of where the VIX will be someday in the future, specifically on the day they expire. The VIX itself is subject to blips up and down as news flow and expectations of news flow et.al change. But over time, the "trading" VIX products tend to assume it will smoothe out and mean revert.

The best analogy is to the weather. Think of the *cash* VIX as today’s weather, and the VIX futures as a contract that guesses the temperature 30 days forward from the day they expire. The same way a warm day in August will not help you call December weather, a blip up or down in the VIX will not likely impact Dec. VIX futures all that much. [cover-2.jpg]

And as always, VIX references are brought to you by VIX Swimwear. "There’s Always a Bull Market Somewhere, and We Promise our Swimwear will make you forget about it".