February 17, 2017
The recent story about low readings for the spot VIX Index is well-reported. What has escaped the attention of many is that prices are now finally coming down for VIX futures at the long end of the maturity spectrum.
The spot VIX has been below 15 for most of the time since July 2016, except for a brief spike up to 22.51 on the Friday before the November 8, 2016 federal elections. Despite the spot VIX remaining low, the highest priced VIX futures contracts have been fairly steadily above 20. Usually the highest priced contracts are the farthest out expiration month contracts. Just recently, they started creeping lower, down into the 19s, then the 18s.
Something different is happening now. The current far-month contract is Oct. 2017, which closed on Feb. 15 at 17.675. That is the lowest number for the highest VIX futures contract since August 2015, just before the China-fueled mini-crash.
This week’s chart shows a plot depicting the value of the highest priced VIX futures contract over time. The prices are inverted to better align with the price action. Instances with the highest priced VIX futures contract being below 18 are pretty rare, and usually associated with meaningful tops. That “rule” did not work during QE3, but it is fair to say that a lot of things did not work then. The rule started working again after QE3 was ended.
You have probably heard of the several VIX related ETNs that are available now. Some folks do not know that those products are not actually tied to the spot VIX, but rather they own VIX futures, either long or short depending on the type of ETN. A big winner this year is XIV, the short VIX futures ETN, which has more than doubled since the November elections. XIV goes short the two VIX futures contracts nearest to expiration. It has a nice upward bias because of the natural time-decay of VIX futures pricing.
Here is what that term structure looks like as of Feb. 16, 2017: