Schaeffer's Trading Floor Blog

The VIX Complex: Same Slope, Different Day

What would Jay-Z say about the VIX term structure?

by 1/30/2013 7:53 AM
Stocks quoted in this article:

There's at least 99 problems associated with trading CBOE Market Volatility Index (VIX) products, and I'm guessing I've written enough about all of them at this point that I don't need to rehash every single one.

But hey, I think I found a solution to one of them. Or, in Jay-Z speak, "I got 99 problems, but figuring out how the VIX term structure sets up now ain't one" anymore.

Yes, someone created this VIXCentral site. Here's a snapshot of today's term structure (click to enlarge):

VIX Term Structure

Each dot on the line corresponds to the VIX future from that cycle. A glance with the naked eye shows a pretty normal-looking, upward-sloping curve. Under the graph, you can see the contango (or backwardation) between cycles, expressed both in absolute terms and percentage terms.

For iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) purposes, the degree of contango between the first and second cycles is the key. That is, until the second cycle gets close to 30 days away, at which point you want to start looking at the contango between the second and third cycles. This is all because VXX maintains 30-day duration and needs to roll out in time.

Is it normal now? Well, the site lets you snapshot any date in the database via the "Historical Prices" tab on the upper left. Here's a comp of today (Jan. 29) vs. Oct. 29 and July 30 of last year (click to enlarge):

VIX Historical Prices

And as you can see, we're at lower levels, but the slopes look virtually identical. So, basically, over the course of the last half-year, the entire VIX complex has simply moved lower across the board.

(Incidentally, disregard the headers on the X-axis -- instead of Future Month, it just represents the number of cycles out in time -- i.e. "July" is just three cycles out from each snapshot).

So, in other words, when the VIX is 20ish and below, the market virtually always says, "Yeah, it's slow today, but volatility is going to pick up in some ambiguous way tomorrow."

That's rarely correct. Three months later, six months later, a year later, the VIX level is likely different but the base assumption is always the same: Quiet today, but wild "tomorrow." Keep that in mind next time someone overstates the foresight embedded in the "smart" volatility market.

Anyway, play around with this site. It feels like a work in progress, but it's got some terrific info right now.

Disclaimer: The views represented on this blog are those of the individual author's only, and do not necessarily represent the views of Schaeffer's Investment Research.


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