http://online.wsj.com/article/SB10001424052748704699604575342911446889540.html?mod=WSJ_PersonalFinance_PF4 “Investors have taken note. On June 30, according to IndexUniverse.com, iPath S&P 500 VIX Mid-Term Futures, which tracks futures contracts on the volatility index, was the fastest-growing exchange-traded product in the country. It grew by 25% on that day alone, taking in $128 million from investors hoping to profit from the spike in turbulence. The iPath instrument has returned 9% over the last month and was up 46% in the second quarter, according to Morningstar, the investment-research firm.” How can you have a futures market on implied volatility? How can that even make sense? I know we had a long, protracted dicussion on option strategies using the VIX (ended up being a bad thing, right?) however, I think I need a refresher on how the index actually works. Any VIX experts out there willing to spare a cent or two?
ASSet_MANagement Wrote: ------------------------------------------------------- > http://online.wsj.com/article/SB100014240527487046 > 99604575342911446889540.html?mod=WSJ_PersonalFinan > ce_PF4 > > “Investors have taken note. On June 30, according > to IndexUniverse.com, iPath S&P 500 VIX Mid-Term > Futures, which tracks futures contracts on the > volatility index, was the fastest-growing > exchange-traded product in the country. It grew by > 25% on that day alone, taking in $128 million from > investors hoping to profit from the spike in > turbulence. The iPath instrument has returned 9% > over the last month and was up 46% in the second > quarter, according to Morningstar, the > investment-research firm.” > > How can you have a futures market on implied > volatility? How can that even make sense? > > I know we had a long, protracted dicussion on > option strategies using the VIX (ended up being a > bad thing, right?) however, I think I need a > refresher on how the index actually works. > > Any VIX experts out there willing to spare a cent > or two? The VIX is just an index. So futures on the VIX would be similar to futures on the S&P500.
The interesting mechanics of the VIX and futures is that they may be manipulated at expiration. I’ve heard rumors of long VIX futures bidding up SPX options come due expiration to get a spike in IV, thus increasing the cash settlement of their future holdings. Specifically end of 2008. The VIX jumped on settlement value for futures…and of course the CBOE will deny this. http://www.greenfaucet.com/?q=node/3754
MFE Wrote: ------------------------------------------------------- > The interesting mechanics of the VIX and futures > is that they may be manipulated at expiration. > I’ve heard rumors of long VIX futures bidding up > SPX options come due expiration to get a spike in > IV, thus increasing the cash settlement of their > future holdings. Specifically end of 2008. The > VIX jumped on settlement value for > futures…and of course the CBOE will deny > this. > > http://www.greenfaucet.com/?q=node/3754 I get what a futures contract is. What I don’t understand is why anyone would buy a futures contract on the VIX, it seems like a terrible idea. Also, MFE, you bring up a good point. Couldn’t big funds just buy a ton of VIX furutres and them manipulate voltility until they are ITM?
http://www.ivolatility.com/ This is the place for you. Volatility trading is another way to hedge sharp falls (vol rises when market plunge). Very profitable if you think that the market is complacent as it was pre crisis. Of course you can use different instruments for a similar efffect, but there is always the consideration of price & action.
Thanks muddahadhadhddhahadhahdhadhdhdhdhdhdhdhdhdhadhadhahdhadhad!
> > Also, MFE, you bring up a good point. Couldn’t big > funds just buy a ton of VIX furutres and them > manipulate voltility until they are ITM? Futures are not ITM or OTM. These are cash settled based on IV on valuation date. And yes, that is supposedly what a few investment firms tried to do (I heard rumors of the funds but will not list them… they are $4B+ funds) There were long a huge amount of VIX futures. (interestingly b/c the outstanding futures was very high for this month), then on valuation date, the market saw an increased number of bids for OTM & ITM SPX options. Now, you can’t do this on a small scale, but if you had $50MM to throw out bids to increase the valuation date to make $100MM-$200MM, that’s a good bet.
If I could move markets like Shia LeBeouf I would play the VIX futures as well.
Very interesting idea, MFE. That reminds me of the stock pinning effect.