April: A Testing Month for VIX Traders

Shorting VIX® was among the top strategies in the past year.  XIV and SVXY both went up over 50% in Q1 2017 (~15% in March alone), almost doubled in the past six months, and returned ~180% over the past 12 months (see Exhibit 1).  However, the declining VIX spot level can only explain part of their performance.

Both XIV and SVXY consistently provide a short exposure to VIX futures, not the spot VIX index.  They are exchange-traded products that track the S&P 500® VIX Short Term Futures Inverse Daily Index, which, as its name suggests, seeks to track the inverse of the S&P 500 VIX Short Term Futures Index.

The S&P 500 VIX Short Term Futures Index takes long positions in the first- and second-month VIX futures contracts.  A proportion of the first-month contract (ticker UX1) is rolled to the second month (ticker UX2) every day to maintain a constant 30-day maturity.  As the second-month futures are usually more expensive than the first month (see Exhibit 2), this long VIX futures exposure usually incurs a loss from the roll (the “roll cost”), while the inverse of this exposure, as provided by the S&P 500 VIX Short Term Futures Inverse Daily Index, usually generates a profit from the roll (the “roll yield”).

The roll cost of the S&P 500 VIX Short Term Futures Index may seem small on daily basis, but in aggregate, it causes the index to go down over a long-term horizon.  In the 12-month period (253 trading days), positive roll cost occurred on 247 days (97.63%).  This is the main driver behind the enormous growth of inverse VIX futures products.

However, April 2017 will be an interesting month for VIX traders for a number of reasons.

First of all, the spread between the first-month and second-month VIX futures contracts has narrowed (see Exhibits 2 and 3).  In addition to the reduction in roll yield of the short VIX futures exposure, the flattening of the VIX term structure usually indicates anxiety being built up in the market.  In a distressed market, the VIX term structure may even -become inverted, when the first-month futures  become more expensive than those of the second month.

Secondly, the spread between the VIX spot and the 30-day realized volatility of the S&P 500 has tightened.  As the benchmark of implied volatility, VIX is expected to be higher than the 30-day realized volatility of SPX.  A tightened spread often indicates that the market is complacent and a VIX spike is on the way.  When VIX spikes, the inverse VIX futures products usually incur losses.


Finally, risk coming from outside of the U.S., including the upcoming French election, should not be overlooked.  As illustrated in Exhibit 5, the term structure of VSTOXX, a VIX-like index that measures the 30-day implied volatility of the Euro Stoxx 50 index, became inverted over the month of March 2017.  As the European market is getting ready for the April 23, 2017 election, market participants in the states might need to fasten their seatbelts.

The U.S. equity market was resilient after Brexit and the U.S. presidential election, but how it will respond to the results of the French election is yet to be revealed.  April could be an interesting month for all VIX investors, on the long or short side of the trade.

Weekend Review – VIX Futures and Options – 4/2/2017

The Friday to Friday change in the VIX term structure was as orderly as I’ve seen it in some time. VIX has had a lower average daily close during a quarter only once, the fourth quarter of 2006.  However, the low to high range for VIX has never been tighter than what we experienced in […]

Weekend Review – Volatility Indexes and ETPs – 4/2/2017

The shift lower in the VXST – VIX – VXV – VXMT curve was 75% parallel and 25% dramatic.  The dramatic move was at the shorter end of the curve where VXST dropped 28% moving from a premium to discount relative to VIX. As noted volatility was lower across the board.  Of interest below, VVIX […]

Weekend Review – Volatility Indexes and ETPs – 3/12/2017

The short end of the VXST – VIX – VXV – VXMT curve moved up while the longer end hardly budged.  TYVIX is at 2017 lows going into FOMC week, but it appears equity volatility may be pricing in some uncertainty in front of this week’s Fed decision. Needless to say and already mentioned, VXST […]

Weekend Review – VIX Options and Futures – 3/12/2017

VIX was higher and all VIX futures were lower last week.  We have been in a pretty steep state of contango which flattened a bit.  However, there are expectations that April will remain elevated due to market conditions in Europe.  This will be explained a little more below. The VSTOXX term structure appears below and […]

Weekend Review – VIX Options and Futures – 3/5/2017

The week over week change for VIX and the futures doesn’t tell the whole story last week. Despite falling on a week over week basis, VIX did show some life closing on Tuesday at 12.92 before retreating to close under 11.00 for the week. I’m going to add something to this space for the next […]

Weekend Review – Volatility Indexes and ETPs – 3/5/2017

Textbook and parallel are two terms that come to mind to described the shift in the VXST – VIX – VXV – VXMT curve below.  Also, steep comes to mind as the longer dated indexes are pretty elevated when compared to VIX and VXST. The long funds below benefited from volatility increasing a bit on […]

Weekend Review – VIX Futures and Options – 2/26/2017

To say that volatility was flat last week is misstating the facts.  Sure, VIX was lower, but wow, look at the rest of the curve.   All contracts were higher with April and May futures leading the way at up over 6%.  For this we will blame France, which I will explain after the VIX Table […]

Weekend Review – Volatility Indexes and ETPs – 2/26/2017

VIX was the only S&P 500 related volatility index that lost value last week.  VXST rose, probably getting a boost from coming off a long weekend.  The longer dated volatility indexes mirrored the action in longer dated VIX futures by moving to the upside.  April seems to be the next month of concern among volatility […]

Weekend Review – VIX Options and Futures – 2/19/2017

We’ve experienced several twists in the volatility markets this year where the futures don’t move in sync or in line with spot VIX.  This occurred again last week as VIX rose almost 6% while the futures markets moved lower.  Part of this may be attributed to February going off the board, at least with respect […]


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