Sunday, December 14, 2014

Smack My VIX Up

I don't have time to expound on this, so I'll leave you to draw your own conclusions.  Presented below are 4 charts that show the VX futures over the last 3 years. (The VIX itself follows the same pattern).

The vertical red lines are equity monthly option expiration days.  Keep in mind that the purchase of put insurance generally peaks with the spikes higher in the VX.  That is when they are most expensive, which leads to the ensuing VIX crush that transfers a lot of money from the put buyers to the put sellers.  

There are two ways I consider a VIX crushing to be successful.

1.  If the VX spike happens early in the expiration cycle and then leads to a slow drain into expiration, as seen in the upper left to lower right chart movement.


2.  If the VX spike happens near the end of the expiration cycle and then gets crushed into the current expiration and also has a slow drain into the next expiration because a lot of the puts purchased will be made in the next month out.

Utilizing this definition of a successful VIX crush, there has been only 3 months in the last 3 years that haven't been a success, and all were muted months.  As you will see, some months are more dramatic than others.

The fourth one from the left is the closest to a VIX crush fail.  But note there was still a crush into friday and how dramatic the continuation was into the next month where most of the puts were likely purchased.
March 2013 - Oct 2013

Oct 2013- May 2014
Here's the current month.  Keep in mind, even if something was 99%, you never know when you're dealing with the 1% it doesn't work.  So while I think equities will bottom this week and have a VIX crushing rally over the holidays, there is no certainty in trading.

May 2014 - Dec 2014