Reading VIX and VXST

By now you folks must know that I post a detailed view of the term structure of SPX options during the day, also you can get the a realtime curve by using the GammaCentral tool.

However sometimes we don't need anything that fancy to draw some conclusions here. For instance pay attention to VXST and VIX right now. Remember that VXST is implied variance for the next 9 calendar days, while VIX is implied variance for the next 30 days. The current readings are:

VXST = 20.18 and VIX = 18.08

What that means is that SPX options are pricing a lot of variance in the near term and then some variance after that, but how much ? The computation is very simple, because we know that variance is additive it means that VIX most contain also the near term variance in it. So we could do a simple arithmetic computation to figure out how much variance is expected from day 10 and up.

Total variance = (VIX/100)^2*30/365

Near term Variance = (VXST/100)^2*9/365

Residual Variance = Total Variance - Near term Variance

So let's compute that.

Residual Variance = (18.08/100)^2*30/365 - (20.18.100)^2*9/365

Residual Variance*365 = 0.61415

And now expressing in volatility units:

Expected Volatility day day 10 to 30 = sqrt(Residual Variance*365/21)*100

 Expected Vol = sqrt(0.61415)*100 = 17.10%

As you can see the current combination of VIX and VXST is expecting a very volatile 9 day period, follow by a calmer one, so there is hope for the market to stabilize near term at least from volatility expectations.

Leo Valencia hosts the Gamma Optimizer options service at ElliottWaveTrader.net.