VIX Open Interest Says This is Not a Top

The VIX futures contract is a comparatively new product in the financial markets, first traded in March 2004.  It has come to be an important product, especially for hedge funds who like to make bets with VIX futures.  And in 2020, it is behaving in a way that is quite unusual, and thus worthy of comment.

VIX futures first traded in 2004, but did not catch on as a meaningful part of the financial markets until 2012.  That was when VIX futures first exceeded 200,000 contracts, and so it is a meaningful inflection point for us to look at and analyze.  In the years since 2012, the total open interest in VIX futures has moved up and down in sympathy with what stock prices do.  That is a fascinating observation, and all the more so right now because something is different now.

This week’s chart shows the total open interest in VIX futures, with its 200-day moving average.  Open interest fell hard with the Covid Crash in February and March 2020, and has only recovered slightly since then.  This is the unusual behavior.  Normally the VIX futures open interest rises along with prices, and we see a price top at the same time as a peak in open interest that is way above the 200-day moving average. 

The weird behavior now is that prices are close to a new all-time high, but the VIX futures open interest remains below the 200MA.  The implication is that we are not seeing the normal sort of topping condition of the past few years.

The caveat to this observation is that VIX futures have really only been a thing for a few years, and so we don’t have a whole lot of history by which to judge this indication.  That is a correct and relevant point.  I wish we had more data to use to establish the rules of interpretation for these data.  But if wishes were horses then beggars would ride.  We have to deal with the market as it comes to us. 

The interpretation which makes the most sense is that the lack of a big rise in VIX futures open interest in 2020 says that we are not encountering a major price top.  If we see VIX futures open interest start to rise in the months ahead, we could get to a condition meriting a major price top, but at the moment this is not that condition.