This Week in VIX and VXN – 9/13/2013

The S&P 500 was higher and VIX was lower.  As this has been a repeatable story for a good portion of 2013 I decided to spend some time doing to data digging on VIX around settlement…

Next week is expiration week for VIX options and futures.  The contracts will cease trading Tuesday afternoon and then a settlement value will be announced mid-morning Wednesday.  This settlement value is determined through opening trades on the relevant S&P 500 Index options.  I have been writing this blog for a couple of years now and the spread between the front month futures and VIX index on the Friday before expiration always fascinates me.  Friday the settlement price for the September contract was 14.80 while VIX closed at 14.16.  The premium of the future to the index was 0.64.  As I decided to pass on Riot Fest this weekend in Chicago and stay home to crunch numbers I did some digging on this relationship.

In 2013 there have been eight VIX expirations and each Friday before expiration week the front month future has closed at a premium to the index.  The average spread has been 0.69 so the on Friday was pretty close to average.  Here’s where things get a bit interesting.  VIX settlement has been higher than the Friday futures close three times and lower five times.  It is worth noting that two of the instances when settlement was higher that the Friday futures closing price it ended up being much higher.  I believe that is also a good illustration of why the futures trade at a premium even on the Friday before settlement week.

I also explored the relationship between settlement and the VIX index closing prices the Friday before expiration.  VIX cannot be directly purchased so this is purely an academic exercise.  All eight VIX settlements this year have been higher than the VIX close on the Friday before expiration.  That is probably another reason the futures are at a premium on Friday.

Finally, I checked out the absolute difference between Friday’s close for both VIX and the futures versus the settlement price.  On average the index change was over 1.00 (1.069 to be exact) while the futures change relative to the settlement price was 0.817.  I may spend some more time checking the numbers using a bit more history after September settlement is in the books, for now it appears the futures premium is justified on Friday and that price is a slightly better prediction of the final settlement than the spot index.

VIX VXN

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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…