The VIX Reaction to Untrue Things On The Internet

“You can’t put anything on the Internet that’s untrue.”  Unlike the girl in the State Farm commercial we know everything that is written on the Internet is not true.  For a few seconds today the market seemed to forget that as a bogus tweet put the stock market into a tailspin mid-day.  In fact the whole incident was so quick that when I inquired on the CBOE floor about how the SPX pit reacted to the quick market drop (and rebound) I got the following response, “I was on a break so I missed the whole thing.”

Since I got nowhere asking one SPX clerk what happened and I believe all roads lead to VIX I decided to look to that market.  I pulled VIX index and futures data off the Bloomberg to see what the reaction was in my favorite derivative market.  Mixed may be a good word.  The chart below shows the VIX index, May VIX futures (front month), and December VIX futures (back month) over the course of the day.  Note the May futures reacted to the move in VIX while the December contract appears to be taking a break with the clerk from the SPX.

VIX Twitter Day

If you do not see the area where the ‘false tweet’ took over for a few minutes it was around 12:09 – 12:10 central time.  December hardly budged.  From 12:00 to 12:10 the spot VIX index rallied from 13.63 to 14.87 or 1.25 points.  Using the midpoint of the bid-ask spread the May futures jumped from 14.62 to 15.97 or 1.35 points.  It appears the front month VIX futures were just as jittery as the rest of the markets.  However, December futures yawned and actually increased by whopping  0.18 from 18.77 to 18.95.  The VIX curve action (or inaction) between 12:00 and 12:10 appears in the chart below.  Note the index and May futures move while the rest of the contracts sort of get nudged a bit.

VIX 1200 - 1210 Curve

Finally by 12:20 the hysteria was over.  You have to love the speed with which we figure out a tweet was bogus.  The next VIX curve chart is not a copy of the one above with the 12:00 time changed over to 12:20, but it sure looks like it.  The equity markets had a blip and so did the equity volatility markets.  The clerk that went on break may think this was nothing more than a bad tick than an actual market move.

VIX 1210 - 1220 Curve

 

No Comments
Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…

Tags

,