For the second weekend in a row The Striking Price column in Barron’s had me at the headline. Last week, Bill Luby was the guest columnist, and it was about small cap volatility and the Russell 2000. Steve Sears (the guy that came up with the term 'fear index') was back at the helm this week and the words “The Case for a 24-Hour VIX” called out to me to read more.
Anyone that has an interest in VIX should take a look at the full article, but here are some highlights.
- Sears notes the recent markets action in response to what has been going on in Greece and China has brought attention to VIX
- He notes that volatility continues to become an accepted asset class citing Pimco, BlackRock, and Goldman Sachs as firms that approach volatility as a method for portfolio diversification and hedging
- Each financial crisis reinforces VIX as the world’s most-followed barometer of investor sentiment which makes VIX the center of discussions surrounding volatility being an asset class
The article then moved on to the discussion about what would be needed to quote VIX 24 hours a day. This would be both interesting and useful during times of crisis. Over this past weekend things were pretty quiet, but recently there have been a couple of Sunday nights where diehard market participants and traders were watching their screens closely as the global equity markets reacted to the latest news out of Europe related to Greece. This sparked the discussion about quoting VIX outside of regular US trading hours.
My first thought was, we have VIX futures and my plan was to discuss that in this space. @Vixcentral did a darn good job over the weekend summing up my thoughts in less than 140 characters via twitter so here is what he said.
VIX futures open at 5:00 pm Chicago time on Sundays and then with small breaks are open until Friday afternoon. On a couple of those Sunday nights where Greece was dominating the headlines I was keeping a close eye on VIX futures and S&P 500 futures pricing. The overnight VIX volume topped 20,000 contracts for each of those sessions. I am aware that there is no fair value relationship between VIX futures and VIX, but VIX futures pricing is based on the anticipation of where VIX will be on a future date so they do move together.
I was one of those diehards keeping an eye on July VIX futures on both Sunday June 28th and July 5th. Both nights S&P 500 futures opened lower and VIX futures were higher. On June 28th the market was pretty surprised by the news out of Greece and the July VIX future was up as much as 21% in the extended hours session. The next day the S&P 500 was down over 2% and it took almost two weeks for the lost ground to be recovered by the markets.
On July 5th, we were seeing a repeat of the action from the previous week, but July VIX futures were up only as much as 15% as its peak. Remember that on July 6th stocks opened lower in reaction to Greece but then worked to higher levels over the course of the day. By Tuesday all the ground lost from the previous Friday was recovered. Both VIX and the July contract were headed lower as well.
So for the meantime, the front month VIX futures contract is available as an indicator of market fear outside of standard US market hours. What I’ve discussed here is mostly from observation which brings out the financial engineer in me. Testing how well VIX futures point to the open for VIX is next on my to do list. This means our summer intern is going to be spending some quality time gathering data this week. What we discover will be reported back in this space as soon as that work is done.