Today, options on December VIX futures expired.
Unlike equity options, VIX options expire on Wednesday, typically during expiration week, but sometimes the week after expiration. Since many investors typically buy VIX calls, in order to make a killing on a huge VIX advance on a sharp market pullback, or as a hedge to a long portfolio, our working theory is that the market may face stiff headwinds in the Wednesday through Friday of expiration week, during expiration weeks in which VIX options expire on Wednesday. The headwind is a result of fresh VIX call buyers coming into the marketplace looking to replace expired calls. Sellers of the VIX calls are likely to hedge some of their risk by shorting S&P futures, creating a headwind that might not be in existence when VIX options expire the week after expiration.
The below data suggests this theory has something to it, as we compared expiration week returns from Wednesday through Friday during weeks in which VIX futures options expire during expiration week versus expiration weeks when they do not expire. We studied data since 2010 since this is when VIX option trading began to skyrocket.