Historic Volatility Term Structure (VIX Futures)

By Lawrence G. McMillan

We have been writing commentary for months now, detailing the steepness of the $VIX futures term structure.  But recently, it has risen to levels never seen before in the listed VIX futures markets (volatility derivatives began trading in 2004).   In this article, we’ll look at the current situation, compare it to past extremes, discuss appropriate strategies, and see if there is any predictive value to these extremes.

When we discuss the $VIX futures, there are actually two things we look at: 1) the level of premium on the futures contracts, and 2) the term structure of the futures (i.e., the relationship of each futures contract to the next one in time).  Both are important, and both have been at extremes recently.

Background

Before discussing the current situation, let’s review the basic formations and relationships that exist in the $VIX futures.  In a bull market, the term structure slopes upward; that is, each futures contract trades at a higher price than its predecessor in time.  In a bear market, the opposite occurs, as the term structure slopes downward, and therefore each futures contract trades at a lower price than its predecessor in time....

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