May options and futures in the CBOE Volatility Index (CBOE: VIX) expired on yesterday’s opening settlement price. Both of these instruments are cash settled, so if you own a future or in-the-money VIX option, you get delivery of nothing. What do you get? A cash credit or debit, and a position that disappears.
Look at it this way — let’s say you owned 1 VIX May 17 Call. The settlement price determined yesterday morning was $18.02. You would get credited $102, the difference between $18.02 and $17 (remember each call equals 100 shares). Subtract what you paid for the call to begin with, and there’s your profit (or loss).
That price sounds too good to be true though, no? I mean check out yesterday’s range in VIX. The high was $17.68. One might think the VIX “open” is … I don’t know, where VIX opened? I realize its not actually a stock, but still … it does have an initial “print”, right?
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Well, glad you asked. It’s not the actual open in VIX that matters, its the post hoc calculated value of VIX based on the opening quote (or print) in each S&P 500 Index Options (CBOE: SPX) series that’s included in the VIX calculation. Here’s the methodology, from the CChicago Board Options Exchange (NASDAQ: CBOE) itself.
“The Final Settlement Price for VIX Futures is determined from a Special Opening Quotation (SOQ) of VIX. The SOQ is calculated from the sequence of opening prices of the SPX options used to calculate the VIX index on the settlement date (the “Constituent Options”). The opening prices for SPX options used in calculating the SOQ are determined through an automated auction mechanism (“Hybrid Opening System” or “HOSS”) that matches buy and sell orders residing on the Electronic Order Book prior to the opening of trading. If there is no opening price for a Constituent Option, the average of that option’s bid price and ask price as determined at the opening of trading is used instead.”
Sounds great, but in reality, it leads to a bit of odd occurrences. Trades print in all sorts of out-of-the-money puts in the SPX so as to include them in the final settlement price calculation. Today that resulted in prints in series in June all the way down to the 725 strike. Throw it all into the equation, and we produce an artificial VIX price that does not correspond to an actual VIX price.
That all reads bad, but in reality its not that big a deal. It will alter the VIX settlement price, but you can just easily benefit by the run up … or knock down … depending on your expiration position. The problem is there’s no real way to know which way it tweaks, so you’re effectively flipping a coin. Given that, I would strongly advise not bothering and just closing any expiring position out.
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