In these second part of my writing on VIX, I will cover VIX Pricing and Post Poll Scenarios and How VIX could react..
Below are the prices of VIX futures as on 2nd may, 2014.
From the prices we can see that 20, May futures is quoting at a steep discount to spot VIX. What could be the reason for such steep Discount.
a) Once the election results are out, the uncertainty will be over, and so the volatility will fall, also the Implied Volatility(IV) will fall and Since IV will fall, VIX will also fall.
b) One more reason of Discount of VIX is because of pricing, Current month IV is quoting at around 34% and June IV is 25% and because of the make in VIX, as time passes, higher weightage will be given to 2nd month IV and since June IV is below May IV, VIX will tend to fall.
First lets see the price of VIX on 20 may, based on IV on May and June Nifty on 20th May.
|May IV||June IV||VIX||Weightage of June IV|
|fall in IV|
|if moves up|
From the above scenario we can see that IV are expected to fall, hence VIX will fall, But life is full of uncertainties, We are also showing the pricing if the IV move up after the election results and The Election outcome is not as per expectation.
Please understand that These scenarios are only for election season and during normal times there will be many other things to look in to VIX.
In Next part I will write on characteristics of VIX, Also some Pit falls and I have also discovered some distortion in India VIX pricing in some scenarios. Which I will share.
This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this topic.
I welcome your critical comments and suggestions.
PS : I intend taking position in VIX.