Friday, December 7, 2012

Unusual Twist in VIX Futures Term Structure as of Late

Even with the U.S. fiscal cliff grabbing all the headlines and keeping the VIX from dipping under 15, I still thought I might be able to trot out my annual series of posts on the holiday effect (or calendar reversion):

As it turns out, fears related to the fiscal cliff have trumped the seasonal factors – at least so far – and the VIX futures term structure has twisted and turned in a decidedly unusual manner.

The graphic below shows the VIX futures term structure curve from November 27th (dotted red line) and again today (solid blue line), eight trading days later. Typically when there are changes in the term structure, the most extreme moves are in the front month (Dec) contract, the second largest move is in the second month (Jan) contract and so on down to the back month, which typically moves only about one third as much as the front month.

What makes the graphic below so interesting is that the front month contract is up slightly (actually up 0.05 points) while the market’s estimation of future implied volatility going out all the way to August has dropped at least 2.2% (Jul and Aug) and as much as 3.8% (Feb). What can we conclude about these changes in the VIX futures? Well, most likely investors are buying protection against a move in December (the VIX futures expire at the open on December 19th) and are selling longer-dated VIX futures contracts for February and other months in order to finance the cost of that protection. All things being said, the market is reflecting less risk in 2013, somewhat offset by a slight increase in risk and uncertainty for the next two weeks or so.

[source(s): CBOE Futures Exchange (CFE)]

Related posts:

Disclosure(s): none

blog comments powered by Disqus
DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2017 Bill Luby. All rights reserved.
Web Analytics