VIX Cash to Future WAY Out of Whack

One of the things we focus on in our option mentoring is understanding VIX.  We teach our option mentoring students to watch the relationship of VIX cash and VIX futures, as they can get out of whack.  Well, let me tell you, they are WAY out of whack right now.  A great resource for watching the VIX futures is VIX Central.  On the site, Eli not only has the current VIX curve, but the curves of every date going back to 2008.  Here is the curve from today:


The spread between the Sep VIX future with 28 days to expire and cash is about 3.5 points.  Normally, we would expect the SECOND month to have a spread that wide, not the 1st month.  To put things in perspective, when the August future had 28 days to expire, the VIX was trading 16.7; yet, the Aug future was priced at 18.6.  A spread of less than 2 points:

So let’s think about that.  We currently have cash VIX that is .75 points lower than it was at the end of July, and, yet, the future with the same days to expiration is .80 higher than it was at the same time.  That is astounding; this spread is going to collapse one way or another. Either the VIX has to move up about 1.5 points, while the VIX futures sit, or the VIX futures have to fall.  The other option is the two need to converge.  In 2/3 of those scenario’s, short VIX futures makes sense.

The Trade:

Something has to give.  We have already seen the VIX rally, but the spread fail to collapse.  At this point, I think VIX futures are a little over baked.  I would be looking to sell call spreads in VIX options or possibly buy puts in VIX.  If one is really worried about the market blowing up, the SPX is MUCH cheaper than VIX right now. Although, relative to realized vol, the SPX is sky high as well.

Mark Sebastian

Disclosure:  We have several VIX and VIX related positions on.