Major market indexes that follow US stocks tend to move in tandem. The NDX and SPX have this sort of relationship. The correlation between NDX and SPX is 0.9544 which indicates the two move very close to each other. Because the NDX and SPX track each other so closely, checking out the relationship between the VIX and VXN is worth taking a look at. The chart below shows the VIX and VXN relationship between VIX and VIX for the twelve months leading up to April 30, 2012.



This VIX and VXN tracked each other very closely over this period of time. Looking at data going back to 2004 these two volatility indexes have a correlation of 0.8953. It may be difficult to see on this chart, but about 90% of trading days the VXN trades at a premium to the VIX. The table below breaks the relationship between VXN and VIX down on a yearly basis going back to 2004.



Note there are years where the VXN is always at a premium to the VIX. However, looking at the last four rows of the table the relationship between the VXN and VIX has been pretty stable. Thinking of the spread as the VXN minus the VIX the spread has been positive more often than not. If the futures contracts follow a similar pattern, spread trading opportunities between SPX and NDX volatility using VIX and VXN futures will certainly emerge.

Directional trading with VXN futures or spreading VXN versus VIX futures are just a couple of potential uses for these new volatility futures. I plan on watching the activity and seeing what else pops out at me as these futures gain some traction. If you have some thoughts feel free to shoot me an email at rhoads@cboe.com or leave comments here.

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At the time of publication, Russell Rhoads held no positions in the stocks or issues mentioned.

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