Tuesday, June 4, 2013

Strange Movement in the VIX Futures


I noticed something odd this morning with the $VIX and the VIX Futures.  The VIX (Volatility index) was down, which usually means that the VIX Futures should also be down, as tracked by the VXX or UVXY, but they were actually up.  When I actually looked at the VIX futures, yes, they were trading up, while the VIX was trading down.



So I got to thinking, why would VIX Future people be buying the VIX Futures, when the spot VIX is actually trading down.  My only conclusion was that if I were a large Mutual Fund or Hedge fund that was going to sell a large amount of S&P stock and I knew I would move the market, then what would I do to hedge myself?  Well, if I knew I could push the market down with my selling, then I would buy puts or buy VIX futures knowing that volatility would increase dramatically and I could profit from my selling.

Sure enough after 1:20PM EST, the selling started in the SPY and the VIX Futures spiked up.  This might become a good indicator of a pending sell off in the market.  I will keep watch eye to see if this theory holds up.
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