VIX Expiration and Forecasts

VIX settled this morning at 19.73, up 1.71 from May. VSTOXX closed at 23.23, up 0.87. Overall despite low volatility levels high economic uncertainly is priced in skew and term structure. My own forecasts for the next expiration are

• VIX at 19.71 vs 19.20 in futures
• VSTOXX at 22.79 vs 22.40 in futures

This is the first time that I recall my forecasts being so close to the market, and obviously makes for a challenging trading environment. As I wrote few weeks ago, I added a forecasts tracker page to the blog, where I record all the forecasts made here. The page has been updates with the settlement values, this month my models have outperformed market forecasts in terms of absolute error. I have also added signal and simulated PL for the futures columns.



Volatility forecasting contest that I announced few weeks ago is now closed. I was hoping for a better response, but I guess readers just afraid to be spammed. Still, I'm happy this way it turned out to be a close-knit group of readers. The forecasts range from 13.50 to 25.12, with average value of 18.12, and median value of 17.01. Using bootstrap I calculated the confidence of 0.70 (1 std) on the forecast, which is much much smaller than anything one would get by a statistical technique! (See the bootstrap of the forecasts below) I'm surprised that most of you emailed forecasts with cents component, as opposed to rounded to a dollar, which to me is an indirect evidence that people really put thought into their forecasts. Good luck, traders, and hedge your deltas!

VIX Expiration

Today VIX expired at 16.49, up 0.11 since last expiration. My prediction made on Jan 20, 2011 was for 18.42 at the time when futures were trading at 18.80. While the forecast is slightly closer than the futures, it is considerably off this month.

At the time the forecast was made the index, futures and my forecast were around the same level of about 18-19. While lower forecast certainly made sense my model did not anticipate the unrest in Egypt, or susequent volatility decline. Since about Feb 4th VIX remained unchanged at around 16, and futures slowly declined to that level.

My forecast for March VIX is 17.44 vs 18.05 (yesterday's settlement) and VSTOXX at 21.39 vs 22.35 in the futures market. Question for the readers: is there an official settlement for VSTOXX, like VRO for the VIX?

Week in Volatility

After a sharp decline last week, VIX traded in a 15.50-16.50 range, surprisingly rising on Thursday , which was the last trading day of the week. Given that many exchanges around the world will be closed tomorrow, and light trading around the New Year I expect the spot volatility indexes to remain low, while the term structure of futures to be high. This all should put some pressure on VXX, however I don't have a forecast. My forecast for the VIX to be in little higher in 16 - 17 range.

For January expiration my forecast is for 17.66 +/- 3.85 vs market forecast (based on futures and options implied volatility) of 19.80 +/- 4.53.