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Why Isn't the VIX Playing Fair?


Volatility index looking suspicious.

Okay, I have no position in anything related to trading VIX, so I have no axe to grind. That said, let me so note the "unusual" action at today's open.

Just to refresh, today is VIX expiration day for June futures and options. They cash-out based on a calculated opening-settlement price. That settlement price is based on the opening quote (or trade) in each qualifying SPX series.

How does an SPX series qualify? The CBOE goes up and down the line until they get 2 consecutive OTM series with no bids and no trades. On expiration day, pretty much every series on the board in the appropriate cycle (in this case, July) will magically trade. Today's open, for example, saw volume in every July put series down to the 400 strike.

What's suspicious?

Well, the VIX "opened" down about 5%. I'm not sure where it will actually settle, but figure something like 31. Meanwhile, the SPX opened unch. and VXX, the trading proxy for 30 day VIX futures, has been unch. or higher all day. But even there, we see an odd trade as the largest one-minute volume was clearly a seller around 9:40 a.m. -- although that was very likely someone fooled by the VIX "print" a minute or so before that.

Look -- we always see the SPX put volume on VIX expiration. But we generally see the VIX settle at a fair price. Today's price doesn't look fair, but rather $1.50 too low or so. And remember: The expiring options stopped trading yesterday and are cash-settled today. So if, say, you were long June 30 calls (open interest 34,754), you had $150 taken from you per contract.
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