VIX Rally Looks Like Real Volatility Lift

by Adam Warner | June 14, 2011 9:27 am

I often note that you need to put day-to-day CBOE Volatility Index (CBOE: VIX[1]) moves in context. On typical Friday’s, VIX understates *real* volatility as traders lower bids ahead of the weekend decay. On Mondays, this reverses as the calendar catches up to the options prices, often resulting in a misleading appearance of strength.

So we should take Monday’s 3.2% lift in VIX with a grain of salt, right? I mean the S&P 500 Index Options (CBOE: SPX[2]) was pretty close to unchanged after all.

Well, not so fast.

The VIX calculation uses two expiration cycles of SPX options and then *normalizes* them to achieve constant duration of 30 days. The Chicago Board Options Exchange (NASDAQ: CBOE[3]) now helpfully breaks it down into nearer cycle — CBOE Near-Term VIX: VIN — and further cycle — CBOE Far-Term VIX: VIF. If there’s a Monday effect, we should see it expressed in the “VIN” part. After all, those are the options with the greater time decay.

Guess what. On Monday, VIF actually rallied 6.55%, vs. .55% in VIN. That suggests to me the VIX rally was more real than mirage.

Its also worth noting that the iPath S&P 500 VIX Short–Term Futures ETN (NYSE: VXX[4]) lifted 1.66%, or about half the VIX move. Most of the time VXX acts like a dog vversus the VIX, but on an average day it tends to track about half the VIX move. Except on Monday’s, when we generally see VIX outperform on the upside. So the fact that VXX did track half the move also implies a *real* lift in volatility sentiment.

Look, none of these are big numbers, so I wouldn’t read *panic* into it. But I would note it’s a bit stronger than we’d expect to see VIX on a typical Monday.

Follow Adam Warner on Twitter @agwarner.

  1. VIX:
  2. SPX:
  3. CBOE:
  4. VXX:

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