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Where Can VIX Futures Go?

Since we have seen a very steady decline in VIX futures across the curve, I thought it was an opportune time to look at how VIX futures behaved in the last few years.  It is hard to say that we will decline back to pre-2007 levels considering the crisis we have been through, the huge government deficits, and the continued weak employment levels and housing market.  That being said, I think it is good to get a perspective of what I believe would be a floor to what we should expect.

By looking at the 5th month VIX futures contract over time, I pinpointed a few different spots in the last couple of years that I thought would be interesting to look at relative to today.  Each point marked a low within its own slice of time:

What a wild ride vol took

With these spots in time marked, now we need to dive into what the VIX futures curve looked like at the time:

An outlier and clustering

Some observations from the above data:

  • First: The most obvious observation is that early 2007 was leaps and bounds lower than the other observations.  That time period was marked by stable and calm markets with little relative price risk.
  • Second: The other4 curves are fairly clustered, possibly giving some credence to the idea that the October 2007 levels could act as a floor in the near term.
  • Third: The lows in ’07 and ’08 were marked by a much flatter curve.  Even though May 08 was elevated, there was little spread between maturities
  • Fourth: Current levels are lower than our 2010 lows pre-Eurozone crisis
  • Fifth: The most important observation in my mind is that the front part of the current curve almost looks cheap at these levels.

This information is rather subjective since I chose the points that I thought would be most indicative for comparison,but I think it does provide some perspective on our current VIX curve.  In my opinion, the 17-18 front vol looks fairly cheap compared to the past, especially if you believe that a reversion to 2006-2007 volatility levels will not happen in a straight line.   It would also seem to make sense that if we believe that the calm markets will persist for the next few months, then we should expect the current curve to flatten out significantly.  A curve flattener position in which you are long the front months and short the further out months would make most sense in that situation as long as you do not believe the VIX index is headed to 10%….

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5 Responses

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  1. Miles Hoffman says

    I sell premium and I found 2010 a very difficult year. Around year end I started collecting data (TOS->dde->Excel) because I suspected the “term structure” and or “smile shape” caused my non-profitability. I’m pretty sure you just confirmed my suspicion. I can’t afford a Bloomberg terminal in my home (& dde unreliable)… is there some other(cheap) way to (easily)monitor the term structure? And how would you change a premium sell strategy in a “steep vs flat” environment?

  2. theta says

    There’s a lot of delta (short) to the suggested trade. If the markets keep grinding up, at the same calm pace, you will get slaughtered as the (non-performing) gamma will be hammered and VIX spot will go lower and lower but 6M volatility will keep more of its value. The flattener trade will make money in a sudden correction but you have to time it properly. There’s a very steep skew in the VIX, and it’s no coincidence that you have this steep term structure after a massive 3 month non-stop rally. Take IV for 10% OTM puts and you will see that the term structure is almost flat, even with no change in the vol surfaces.
    So, bottom line, if you believe a correction is around the corner then place a flatenner trade. But in that case selling futures might be a better bet.

  3. new2vix says

    May I ask which Bloomberg page allowed you to plot the term structure as you did?

  4. SurlyTrader says

    “VIX Index CCRV”, or “CT” then click on plot term structure

  5. James says

    Surlytrader,

    What charting or trading platform are the attached graphs taken from?

    Thanks!



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