Free VIX Cheese?

• Posted by Adam Warner
• on March 30th, 2010

So I try to remind everyone here and on twitter than Monday Morning VIX can beguile with it’s misleading strength. The natural question of course is whether you can profit in any way from the knowledge that VIX act poorly on Friday and very well on Monday (at least early in the day).

The answer is no.

Remember there’s no way to buy and sell a “spot” VIX. Well, other than using actual SPX options. But actual SPX options have this funny thing known as “time decay”. If you buy “cheap” Friday options, all you’re doing is owning “time” over the weekend at a reduced price. It should carry a reduced price however, nothing trades. The volatility of the options you own may look better on Monday, but that will be offset by the fact that there’s 3 fewer days of life in the option. By and large these two factors offset in actual dollars, The long side will sometimes win (you do get gaps on Mondays) and the short side will sometimes win (the Friday volatility reduction did not fully price in 3 days worth of decay, especially if Monday opens very near unch.).

The point being, the actual options have close to a zero sum game. A recent study I linked to seemed to indicate that even with the Friday time decay “pre-sale”, options still overprice weekend risk.

As to the actual VIX futures and VXX, weekends (and holidays for that matter) do not have this same dynamic. VIX futures snapshot a specific date (when they expire). Whatever quirks exist with that date are factored in at every moment in time. Think of it like a dividend that’s already priced into the options board. And VXX is just a derivative off VIX futures.

In fact, this is all a long-winded explanation of why there’s no *spot* VIX to trade. If they do ever create one without simultaneously adjusting VIX methodology, then go short it every open and cover every close, go major long on the Friday close and sell it out early Monday.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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