Adam Warner on VIX settlement Wednesday morning 17 June in Daily Options Report:
… the subject du jour, the seemingly odd VIX expiration settlement.
The VIX closed Tuesday at 32.69, yet on Wednesday it “settled” at 31.03 with a pretty flat SPX open.
The real oddity though is that June futures closed Tuesday at 31.80, an oddly large discount to the VIX. Now they don’t have to close identically, but 3% off does seem high.
So put in that context, the VIX settlement at 31.03 is not quite as off as met the eye. What was off was the actual VIX close.
Which leads me to think I should practice what I preach. I note often that the VIX is not exact to the point, and never a perfect reflection of volatility in the market. For whatever reason, the calculation on Tuesday night overstated the VIX. The VIX lifted about half a point late in the day. Maybe an SPX put buyer walked in late, maybe the SPX cash closed incorrectly, I really don’t know and it really doesn’t matter. VIX futures and options traders clearly knew the “runup” didn’t mean anything.
Again, the VIX is a stat. There was no arb here, there’s no actual VIX you could have sold at 32.69 then covered on Wednesday’s open. You could have sold VIX June futures at a 90 cent discount and made money however.
So while upon further review the 31.03 settlement does not look quite as absurd, it’s still a bit low, probably a point or so. Which highlights the most important lesson in all this. If you do trade VIX or VIX options, do close anything in or near the money before the cash out, otherwise you’re just playing a lottery on whether you win or lose on the runoff.
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