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VIX Curve Improves by Most Since 2008 as Volatility Jolt Fades

Published 02/15/2018, 07:59 AM
Updated 02/15/2018, 08:33 AM
© Reuters.  VIX Curve Improves by Most Since 2008 as Volatility Jolt Fades
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(Bloomberg) -- For the VIX futures curve, time has healed all wounds.

The enormous spread between front and second-month VIX futures contracts, which are tied to the Cboe Volatility Index, was a barometer of just how roiled the market was during the recent downturn. It also caused severe pain (and in one case, death) for some products linked to the VIX.

Generally, the VIX futures curve tends to slope upward -- called contango -- in accordance with the notion that uncertainty surrounding the range of possibilities for equities increases over time. In times of stress, it shifts to the opposite curve structure, known as backwardation, a sign that traders are acutely fixated on the near-term risks. At the S&P 500 Index’s lows on Friday, this gap between the second and front-month contracts was nearly -9.5.

The spread between the second and front-month VIX futures contracts has tightened by 7.5 points. That’s primarily a function of the roll in VIX futures contracts, as a relatively expensive February contract is no longer trading as of yesterday. The active front-month contract is now March. The move has pushed the spread between the two contracts back into positive territory. It’s poised to be the second-largest daily shrinkage in this gap on record, surpassed only by Aug. 20, 2008.

Not coincidentally, that was also a day when VIX futures contracts rolled.

The February VIX expiry -- and the expiration of many stock-linked options on Friday -- will subtly shift the investment calculus for a handful of exchange-traded products that deal in derivatives, in some cases removing lingering overhangs.

In the case of VIX futures, for example, this move should relieve some of the headwind for surviving short-volatility products like the ProShares Short VIX Short-Term Futures exchange-traded fund (SVXY) and reduce the recent tailwind that long-volatility products like iPath S&P 500 VIX Short-Term Futures exchange-traded note (ticker VXX) have enjoyed.

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