A VIX calendar-spread case after the 2015 volatility spike

The VIX as a regime measure

The VIX is described as a 30-day forward implied-volatility measure on the S&P 500. It is built from a strip of short-term out-of-the-money calls and puts and is weighted toward constant volatility exposure over a 30-day window.

Implied volatility is used here as a model-free, option-implied measure of expected near-term variation. Editorial: that reading classifies whether markets are in a typical, elevated, or shock regime before any spread is considered.

A volatile print and a later correlation window

In the archive case, markets were treated as volatile when the VIX stood above 25. A prolonged low-VIX period was associated with a contango futures curve. A sharp VIX spike was associated with backwardation.

After the August 2015 yuan devaluation episode, the archive records an August 24, 2015 session in which the Dow fell more than 1,000 points at the open, the S&P 500 broke the 2,000 level, the index dropped about 4%, and the VIX closed at 40.74 after a surge of about 45% and a spike above 50.

The archive frames the VIX and the S&P 500 as negatively correlated over July 31, 2015 to February 12, 2016, with the VIX rising as the index fell.

What the futures curve added

Contango is a futures curve shape in which later expirations trade above nearer ones, typical after implied volatility has stayed low for an extended period. Backwardation is a futures curve shape in which nearer expirations trade above later ones, typical after a sudden implied-volatility spike.

The term structure is the set of VIX futures prices across expirations. Editorial: it is used to judge whether a shock is concentrated in the front or spread more evenly along the curve.

One calendar-spread sequence

A calendar spread is a two-leg futures or options structure that is short one expiration and long another, so the trade depends on relative change across the term structure rather than a single outright direction.

A worked calendar-spread example shorted May VIX futures and bought July VIX futures after the May-July differential stood at -0.10, on the view that May would change more than July and the spread would widen.

On February 19, 2016 in that example, May futures fell 0.40 to 22.825 while July futures fell 0.275 to 23.05, producing a net of 125 on a 1,606 margin figure and a 7.78% holding-period return for that day.

Editorial: those three facts are the entry view, the intended relative move, and one recorded holding-period outcome. They are not a forecast for later markets.

The outright short that came first

An earlier outright short in March VIX futures in the same case closed after two sessions with a combined 2,200 result on 6,215 initial margin, or 35.4%, before the case switched to the calendar-spread test.

Editorial: that switch is the abstention step in the classroom. The archive leaves the single-expiration short so the remaining rules can isolate relative change across the curve. The two-session close and the one-day calendar result are the only exit facts in the case.

Options that expire with the futures

The archive presents VIX options as an additional instrument set with weekly and monthly expirations that settle on the same day as the matching VIX futures, using February 2016 monthly futures expiration on Wednesday, February 17, 2016 as the illustration.