This also means that should the VIX spike higher from current levels, ETNs such as VXX of TVIX and others should see enhanced returns due to an increase in volatility plus favorable term structure and roll yield.
One problem with backwardation is that it tends to be fleeting. Of the 59 instances of backwardation in the front and second month portion of the VIX futures term structure going back to the inception of VIX futures in 2004, 37% lasted only one day and 56% lasted no more than two days, fully 83% of all instances of backwardation had ended within six days and only six backwardation events in seven years have lasted more than the current eight days. Not surprisingly, three of those six periods of extended backwardation were from 2008, two were from 2009 and the last one was from 2007.
To state what I hope is the obvious, detailed knowledge of the workings of the VIX futures term structure is mandatory for anyone who trades VIX ETPs. Not only does one need to know what the implications are of the current term structure, but also to have a sense of how that term structure is likely to evolve over time.
- VIX Term Structure Evolution Over Last Ten Days
- VXX Calculations, VIX Futures and Time Decay
- Why VXX Is Not a Good Short-Term or Long-Term Play
- 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
Disclosure(s): long XIV; short VIX, VXX and TVIX at time of writing