In addition to annotating the backwardation and contango in the graphic, I have also circled the December VIX futures and options expiration (December 21st) in an effort to preempt some questions about why these futures seem unusually low both now and two weeks ago. The simple answer is the preponderance of holidays toward the end of the year, with fewer trading days translating into fewer opportunities for extended moves in volatility. I have discussed this phenomenon many times in the past (see VIX and the Week Before Christmas, for starters) and have named it the “holiday effect” or “calendar reversion.” Also note that December has a history of being relatively bullish for stocks, with low volatility.
Finally, I have fielded quite a few questions about the implications of yesterday’s 35.4% VIX spike. Here some prior research on the Short-Term and Long-Term Implications of the 30% VIX Spike will undoubtedly be of interest to most readers. The quick takeaway is that this event is bullish for stocks and bearish for volatility. I would expect to see more evidence of this fact beginning to kick in on Monday.
- Capitulation in Back Month VIX Futures
- VIX Futures: What Were/Are They Thinking?
- More Volatility + Less Fear = Lower VIX?
- VIX Term Structure Changes Since November 20th
- VIX and the Week Before Christmas
- Short-Term and Long-Term Implications of the 30% VIX Spike
[source: Interactive Brokers]
Disclosure(s): short VIX at time of writing