What to Make of a Flattening VIX Futures Curve

How to interpret what the futures market is saying about the CBOE Volatility Index (VIX)

by Adam Warner

Published on Jan 14, 2015 at 9:03 AM
Updated on Jun 24, 2020 at 10:16 AM

Time to open up the viewer mailbox!

"Just as interesting as the treasury curve flattening, is the vix curve flattening out. Maybe a blog topic for you....seems rare."

Indeed, we are on the flat side in CBOE Volatility Index (VIX) futures land. Here's how the curve looked at Monday's close (click chart to enlarge):

VIX Futures on Jan. 12

That's about an $0.80 difference over the course of seven months, which is very low. Just to put it in perspective, VIX had a $4.50 seven-month spread in early July. That has everything to do with the absolute level of VIX itself. In early July, VIX had a 10 full. On Monday, that full was 20. Right or wrong, the market always assumes VIX is going toward 20, as that's about the long-term mean. So now that we're actually near there, the futures don't assume all that much will happen going forward.

So a better comparison is to see how the curve looked when VIX is near 20. With that in mind, here's the term structure from yesterday, in addition to how the term structure looked on three other dates last year where VIX itself was at or near 20 (click chart to enlarge):

VIX Futures

The blue line is Monday. This is actually the flattest the curve has gotten, though it looked pretty similar in December and there's a bit of a calendar quirk there, so we'll say it's essentially identical outside of 60 days. The whole term structure is clearly flatter and higher in these two recent VIX pops compared to how it looked in October and February of last year.

The futures market is essentially saying that it expects to see VIX in this general area in 2015. That does make some sense. As we noted the other day, the volatility pops are getting more and more frequent, which suggests it's less "pop" and more a new normal. And again, we're near the forever-term mean.

It's important to note that a spike in volatility does not necessarily go hand-in-hand with a market shock. It happened in the late '90s, and the market bubbled up much higher on expanding volatility well before it peaked. On the other hand, the creep up in volatility in 2007 did "predict" the ugliness of 2008.

Logic says we see neither extreme in 2015. Logic also says not to read much into a sample size of two, especially when there was no particular similarity in the two experiences.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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