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Artifacts in VIX Futures Curve

With all of the movement in the VIX futures curve and strange supply/demand dynamics, it seems like there are almost always kinks in the curve.  If we look at the current curve, December 2011 VIX futures are trading a bit above 34 while January VIX futures are trading a bit above 35:

 

Kinks in the VIX futures curve

There is no guarantee that this difference will not widen or stay this way for a while, but it seems nearly definite that the gap will close at some point as the curve settles down.  You could short the January VIX futures and buy the December 2011, but at $1,000 per point this might be too large of a trade for most.  Alternatively, options on the VIX can be traded in contracts which are $100 per point.   Many combinations of trades could capture a shrinking of the Dec/Jan gap.

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4 Responses

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  1. razvan says

    It’s due to seasonality. Last year, the same pattern occurred between VIX NOV10, DEC10 and JAN11. Only it was in the summer and it started to adjust when we had the QE2 rally (starting in September). This years, it also started in the summer, but it keeps on going.
    I would say, that the “artifacts” in this year’s curb will adjust closer to the expiry or if we get a sustained rally (less likely).

  2. Rower32 says

    Could you name a few of those combinations with the highest risk-reward ratio? Also appreciate if you post about the S&P 500 skew relative to its historical avg. Thanks.

  3. ivan says

    ah it s seasonality, ST, there is little vol over christmas generally. the dec vix as you know is a reflection of one month expected vol seen in mid dec so it s somewhat natural then.

  4. SurlyTrader says

    Then I would think January would be a low vol month because of the “January” effect and the average positive return in January. As for December….do you remember Dec 2008? I do.



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