VIX Settlement: Carpet Bombs in the SPX
The VIX options for February expiration settled yesterday morning at 22.50 based on the calculation of the implied volatility in the S&P 500 options on which this index is based.
This typically causes what is known as the carpet bomb in SPX options on the open, where today, every out of the money March put and call option in with a market will trade.
Take a look at the volume on the OptionsHouse chain.
This settlement procedure can move the index a great amount from the prior nights close if all the carpet bomb orders are on one side of the market; buying or selling. Yesterday, that was not the case, as the final settlement was only pushed slightly higher pinning the 22.50 level. However, the VIX is unique in that it doesn’t really have an underlying that can be easily traded by retail investors. Traders who were long the 22.50 calls saw their premium of 32 cents disappear. So did the holders of the 22.50 puts who saw 25 cents of premium vanish. Please be aware of the special risks associated with trading in these VIX options.
As an indicator of market sentiment, yesterday the VIX was trending lower with the modest rally in the market.
The indicator fell back down to the low 20s late yesterday, possibly reflecting the unknowns of the sovereign debt crisis in Greece, and the passing of earnings season. Also, the fact that yesterday’s rally in US equities basically held steady throughout the day may be lessening fears of option traders. A low-trending VIX so close to Friday’s expiration seems to indicate it may be a quiet one.
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