There will be a lot of buzz around the CBOE and in the options community in the coming month about the action of the VIX in anticipation and response to the impending “fiscal cliff”. With that thought in mind, remember that the VIX is 30-day implied volatility of the S&P 500 (SPX) as projected through SPX options from the front and second months, such that the front month does not have less than one week to expiration. The VXN uses the same methodology but using NASDAQ-100 (NDX) options. So, both the VIX and VXN are being calculated with November and December expiration months, and have yet to incorporate January. Since the fiscal cliff isn’t until January 1, 2013 this could be an explanation to the odd pricing behavior we’ve seen recently—SPX and NDX are down on the week, and VIX, VXN and their futures are down on the week with no earth shattering moves. Front month VXN futures are actually at a slight discount to the spot index which is a change from last week.
On a more global scale, it will be interesting to see how the combination of the escalation of the recent disturbances in Israel and the fiscal cliff will affect US markets in the coming weeks.