VIX Expiry, VXX Rebalancing Occur - TheStreet

The December front-month futures contract of the CBOE Volatility Index (VIX) expires at the close of trading today. There are two ETNs tied to this index: the iPath VIX Short Term Futures (VXX) - Get Report and the iPath VIX Mid-Term Futures (VXZ) - Get Report.

The VXX tracks the first and second month contracts, currently December and January of the VIX futures. After today's close, the two front months become January and February. This rebalancing can affect price when there is an unusual difference in the slope of the contracts.

The VXX contracts are in "contango," that is, the front months are cheaper than the back months. The "Dec" contract is currently $21.25 and the"Jan" contract $25.15, a difference of $3.90. When the "Jan" contract becomes the front month, the "Feb" contract will be used in the pricing computation and the difference between those two contracts, in less contango, is $2.08.

The difference in price then between the sets of months is $1.82, and based on the formula used to price the VXX, the roll-over should account for a drop in price of 6 cents. This may get priced in as expiration approaches or be discounted in a "gap" opening. It will be an interesting dynamic to watch as an exercise. A pair trade against the VXZ that is priced to the back months and in less "contango" might be a safer scalp for experienced traders.

Robert Moreno is a former member of the New York Cotton Exchange and the New York Board of Trade. He has traded for his own account for over 25 years. An experienced market technician and student of the art since the days of paper charts and manual computation, he authored a daily technical analysis information sheet popular with brokers and traders in the "pits." Currently, he is a General Partner at Wyckoff Investment Partners, LLC, which provides technical and fundamental research and analysis to traders and investors.