Wednesday, October 28, 2009

VIX Spike and VIX Futures Contango Means…

Sometimes I like to skate around some of the salient points of volatility rather than to try to hit readers over the head with them, but with the VIX now 16% over its 10 day simple moving average, I hope I am not the only one going short volatility. Specifically, anyone who has been paying attention to my comments about VXX should be looking at opportunities to get short this VIX ETN.

At the moment, not only do short VXX positions have mean reversion going for them, but even with the spiking VIX, the VIX futures are still in contango, meaning that they are upward sloping over time, with the second month more expensive than front month. The chart below shows that while the difference between the second month VIX futures and the front month VIX futures has been declining, it is still substantial, which translates into a meaningful negative roll yield that continues to work in the favor of shorts.

Finally, not too long ago VXX was difficult to short at most brokers. This is not the case any more…

For additional reading on this subject, readers should check out:

[source: FutureSource]

Disclosure: Short VIX and VXX at time of writing.

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