A Tale of Two Volatility Curves

VIX and VIX Futures reacted as expected based on today’s 14 plus point drop in the S&P 500.   The near end of the VIX Futures curve went into backwardation with VIX closing at 19.41, the October contract closed at 18.50 and the next two months at lower levels as well.  There hasn’t been too much backwardation in the VIX market over the past couple of years.  In fact depending on how you quantify it we have probably only had about a dozen or so instances since the last real VIX spike in August 2011.  To get a feel for today’s volatility market reaction take a look at the chart below.  It shows the VIX curve on Friday which was in contango and then today’s price action that shifted the curve to backwardation.

Curve 1

The new kid on the volatility block is the CBOE S&P 500 Short-term Volatility Index (VXST – 20.18) which rose over 21% today and went to quite a premium relative to old school VIX.  For those that didn’t see the big release last week, VXST is a new volatility index based on shorter dated SPX options.  This short term volatility index uses the same methodology as VIX, but measures nine day implied volatility.  VXST can be combined with VIX and the CBOE S&P 500 3-Month Volatility Index (VXV – 19.07) to create a consistent curve of 9-, 30-, and 93-day implied volatility as indicated by SPX option pricing.  That curve as of Friday and then today appears below –

Curve 2

Both curves are representing relative volatility measures over different time periods.  The one thing they both have in common – backwardation.  This is an indication that after a year of low volatility, we appear to have some real uncertainty regarding the future direction of the stock market.

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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…

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