Current VIX Backwardation Streaks in Context

When VIX is relatively high the VIX term structure moves into what we commonly refer to as backwardation.  The way this may be defined varies among market participants, but most focus on the shorter end of the VIX curve.  That is what I’ve been doing lately as well.  It turns out, regardless of how you define VIX backwardation 2016 has experienced more instances of it than not for the first ten days of 2016.  The tables below rank the consecutive day streaks for VIX backwardation by using three different ways of defining the relationship between spot VIX and VIX futures or even between VIX futures contracts.

The simplest definition of backwardation might be when spot VIX closes higher than the first month future.  With the exception of the first two trading days in 2016 spot VIX has closed at a premium to the first month (January 2016 VIX) each day this year.  As of Friday the current streak is at eight days, which places this run in a tie for 12th place.

Spot FM


Many volatility derivative traders like to focus on the relationship between the first month and second month.  That is due to this relationship having an impact on the VIX oriented ETPs (VXX, SVXY, UVXY, etc).  Currently that is the January 2016 and February 2016 VIX futures contracts and January has closed higher than February for all ten days in 2016 which puts this ten day run just inside the top 10 of backwardation streaks.

Spot FM SM


Finally, a more rigorous definition of backwardation would involve spot VIX closing at a premium to the first month and the second month closing below the first month.  This has occurred each day since January 6th for a streak of eight consecutive days which is tied for 7th place among backwardation streaks.

Spot FM SM


I put up a ten minute video expanding on VIX backwardation and discussing these various streaks a little more.  You can view that at the link below and keep an eye on this blog site as we track the current streaks for each of these methods of defining VIX backwardation.

Checking on the Current VIX Backwardation Streak 1/15/2016

VIX Options and Futures Review – 1/17/2016

Two tomatoes are walking down the street, momma tomato and baby tomato.  Baby tomato can’t keep and momma tomato keeps getting angrier and angrier.  Finally she stops, turns around and stomps on baby tomato.  She then states, “Catch up”.

That’s what the VIX futures did this past week, with the stock market playing the role of baby tomato and getting stomped on.  When the dust settled this week VIX was actually up by 0.01 with VIX futures narrowing the gap.  January, which settles on the open this Wednesday, gained 4.75% closing at a slight discount to spot VIX.

VIX LT Curve


The theme for the short term VIX chart below is “The Twist” as the generic charts were lower or higher depending on the time frame.  In general the angle of the curve remained pretty much the same.

VIX ST Curve

Mid-day Friday there was a trader who came in and purchased about 25,000 of the VIX Jan 35 Calls for 0.33.  This occurred with VIX around 28.10, higher than where we finished the week.  The payout at January settlement, which again is this Wednesday morning shows up below.



Volatility Indexes and ETPs Review – 1/17/2016

In an interesting twist VIX was the underperforming index across the VXST – VIX – VXV – VXMT curve rising only 0.01 last week. It is unusual for VIX to be an outlier like this, but even more so when we experience a three day weekend which one would expect to put some pressure on VXST relative to the longer dated volatility indexes.

VXX rose about 7 ½% last week despite the paltry 0.01 gain in VIX. We all know that VXX is not VIX or even any sort of direct exposure to spot VIX. VXX is a consistently rebalanced portfolio focusing on the front two month VIX futures contracts which until this coming Wednesday consists of the January and February contracts. January VIX rose 4.75% last week and February was higher by 5.53%. However, January closed at a premium relative to February every day last week which added to the VXX performance as what is called the roll yield (and is usually a negative experience for VXX performance) was very much a positive.

SKEW and VVIX finished the week at elevated levels, although VVIX was down slightly. Both are indicators of concern about downside for the equity market so both are showing many market participants believe there is more to come despite the worst ten day start for the stock market on record.

VXX Table

What has been good for the long ETPs has been a catastrophe for the short funds, for example SVXY is down more than 28% in 2016. It appears to me that someone may be expecting more downside from SVYX. Late Friday with SVXY at 36.01 there was a seller of 500 of the SVXY Mar 18th 25 Calls for 12.50. This trade took in 1.49 of time value but for the most part is a short play on short volatility (negative times a negative is a positive so it’s a play on long volatility as well). It is possible the trader also holds a large long position in SVXY and is hedging the trade by selling a deep in the month call. Either way this shows worry that what we have experienced to start 2016 may be expected to continue, at least for the next few weeks.


VIX January 22 / 30 1 x 2 Call Spread from Monday

Today, while I was teaching at the Options Institute, a roar came up from the VIX pit about an hour into the trading day.  Despite the tumultuous market activity that we have experienced to begin the year, the audible volume from the open outcry pits has been fairly tame.  What got the guys going today was a very large ratio spread using January VIX Calls that expire on the open next Wednesday.

The specific trade sold well over 100,000 of the 22 Calls and purchased twice as many of the 30’s.  To bring things down to a workable visual let’s just say they sold 1 VIX Jan 22 Call at 3.35 and then purchased 2 VIX Jan 30 Calls for 0.95 each.  This results in a credit of 1.45 for each 1×2 spread.  At the time VIX was near 25.50 and the January futures trading at a small discount to spot VIX.  The payout at January 20th VIX settlement appears below.

VIX 1 x 2


This trade works if one of two things happen – either a drop below 22.00 where all options expire out of the money or a big rally to the upper 30’s.  Of course a big move in either direction may result in this trade being taken off early.  I’ll be watching those two strikes for the next week or so to see how this one may be managed.

VIX Options and Futures Review – 1/10/2016

The VIX curve moved from flat to backwardation as the S&P 500 dropped almost 5% to begin the year.  We finished the previous week with the curve pretty flat which is often considered an indication of uncertainty among volatility traders.  As a stretch of a visual I think about a flat volatility curve replicating a ‘fair coin’ which is the proper academic way to introduce a true 50 / 50 prospect.  That coin toss turned out to be extremely bearish for the equity markets this past week.

VIX Curve + Table


The short term VIX curve is often very flat since the near dated VIX futures tend to follow the performance of spot VIX fairly closely.  That has been the case except when we get a spike in volatility like last week.  Just like the more established VIX curve above, the short dated futures are in backwardation.

VIX ST Curve + Table


We have short dated futures on VIX and short dated options as well.  Both have caught on very quickly, and the trade from this past week uses two of those expiration series to create a VIX put calendar spread.  The biggest block trade on Friday involved a seller of the VIX Jan 27th 16 Puts at 0.11 who the purchased the same number of VIX Feb 3rd 16 Puts for 0.18.  A payoff diagram is tough for this trade since both options have different underlying pricing instruments.  My thinking is the trader expects one of two things.  Either they expected the Feb 3rd contract to maintain enough value at Jan 27th expiration so this trade turns a small profit or they are trying to thread the needle expecting Jan 27th VIX settlement over 16.00 and Feb 3rd VIX settlement below 16.00.  In this case I am leaning more to the first thought than the second though.

Volatility Index and ETPs Review 1/10/2016

The S&P 500 experienced the second worst week in performance since 2011.  For those with short memories, the worst week came about four months ago in late August.   What both these weeks have in common is China which continues to experience financial market woes and, despite their leader’s best efforts, there seems to be no end to the volatility coming out of that part of the world for the foreseeable future.


The market action pushed all four S&P 500 related volatility indexes higher last week and into a state of backwardation that is often associated with broad concern among equity market participants.  It is worth noting that all four are well under the levels reached in August.



In 2015 all the volatility oriented exchange traded products lost value.  Both the long and short ones came under pressure due to increased volatility experienced by the futures contracts that these products are designed to track.  That was not the case this week as the leveraged longs put up a 50% week, the long funds were up about 23%, and those poor short guys lost about 20%.

VXX Table


The last big trade of the week in VXX options was an interesting one.  It appears a trader purchased 10,000 of the VXX Jan 29th20 Puts for 0.29 and sold 20,000 of the VXX Jan 29th 19 Puts for an average of 0.115 (0.23 per spread) for a net cost of 0.06 per spread.  The payoff if held to Jan 29th appears below.



Personally I like to receive a credit for such trades so if I am wrong the result is a small profit.  In this case VXX in the 20’s results in a loss of 0.06.  The best case is a 0.94 gain if VXX closes right at 19.00 and things get hairy below 18.06.

VIX Weekly Futures Prices Rose 42% in First Week of 2016 – By Matt Moran

The first week of 2016 was a challenging one for many financial markets worldwide, as (1) It was the worst opening week of the year in history for both the S&P 500® (SPX) and the Dow Jones Industrial Average, (2) The Shenzhen Composite Index of Chinese stocks fell 14.2%, (3) Crude oil futures (Feb. WTI) fell 10.5%, and (4) The U.S. dollar posted its biggest weekly loss vs. the yen since August 2013.

Were there investable instruments that had diversification potential with double-digit increases last week? As shown in both the table and graph below, the Week 2 Weekly futures on the CBOE Volatility Index® (VIX®) (with an expiration date of January 13th) rose 42.1% last week. (The VIX Index spot value is not directly investable).

1 - Table for VIX Views2 - Line charts VIX futures
As shown in the chart below, over the three trading days ending August 24, 2015, the VIX Weekly Week 34 futures rose 147%.

3 - VIX fut Aug 2015

Extended trading hours are provided for VIX futures and options, and on SPX options.
4 - ETH options5 - ETH VIX futures
More information on use of VIX futures and options (including delayed price quotes) is available at and

Five Takeaways from 2015

2015 is behind us and the S&P 500 dropped (more than a rounding error) for the first time since 2008.  If you want to put a positive spin on the year you can say with dividends the S&P 500 was higher.  It was a fun year to be a market participant as we experienced some things that could be considered new or at least different relative to recent market history.  Since everyone loves lists, or gets easily sucked into them, here are five takeaways from the volatility markets in 2015.

1. VIX Average Closer to Historical Norms

Last year VIX averaged 16.67 which was over 2 points higher than the average for both 2013 and 2014.  As I write this I note there was very little of the “is VIX broken” stuff coming out of the media in the second half of 2015.  The chart below shows the range and average by year going back to 1990.  The technical analysts will note 2015 had a higher high, higher low, and higher average (trend change?).



One other chart with respect to the VIX average shows up below which shows the rolling 1, 5, and 10 average closing prices for VIX since 2000.  Note the 10 year average remains pretty steady around 20 which is the number that is often cited as a long term average for VIX (because it is the long term average for VIX).  To maintain that long term average VIX is going to need to be elevated over the next few years.



2. Russell 2000 Volatility Was Relatively Low

Russell 2000 implied volatility as indicated by the CBOE Russell 2000 Volatility Index (RVX) was relatively low in 2015.  The average for the year was 19.39 which was actually down a bit from 2014’s average of 19.42.  Also, many of us volatility watchers like to compare RVX to VIX.  The chart below takes the closing level of RVX and divides it by VIX.  Until 2015 there had only been one trading day where RVX closed lower than VIX.  This past year is happened several times as indicated by the ratio closing below 1.00.



3. SKEW High for the Second Year

In 2014 the average for the CBOE SKEW Index was 129.75.  I personally brushed that record aside thinking it was a function of VIX being at relatively low levels (I was wrong).  Last year SKEW averaged 127.50, despite VIX averaging a higher level than in 2014.  I’m hearing rumblings that there is a structural market change with respect to institutions using out of the money SPX put options to hedge against any dramatic drop in the stock market.  The thinking is due to regulatory restraints many institutions are judged on their ability to weather any sort of dramatic financial market weakness (think the stress test).  Holding out of the money SPX puts is an efficient and relatively cheap way to pass a stress test which increases the demand for those puts and results in elevated out of the money implied volatility when compared to historical levels.



4. VIX Backwardation Lives!

The table below is my own method of determining whether the shorter part of the VIX curve is in contango or backwardation.  For VXX traders the column showing where Month 1 closed higher than Month 2 is most significant.  About 1 in 5 days last year the front month was at a premium relative to the second month which benefits the performance of VXX.  Despite this VXX was down about 36% last year.


Contango - Backwardation

5. Long and Short Volatility ETP Performance

As noted in the previous point VXX was down 36% last year, despite a little more backwardation that we have seen in years.  There are also some ETPs that offer the inverse return of VXX, but on a daily basis so compounding may result in one of the inverse funds not having the inverse performance of the long fund over time.  In a choppy year, like 2015, there can be a dramatic disconnect and there was.  There are a couple of short funds, but I focus on SVXY as it has an active option market.  SVXY was not up 36% in 2015 as VXX was down 36%.  In fact SVXY lost value as well dropping 17.5% for 2015.  If anything this is a great lesson in how inverse funds do not return the opposite of their long fund counterparts and the more volatility the underlying market the bigger the possible disconnect.

VIX Last Week – 12/20/2015

VIX gave up 15% last week, despite the S&P 500 losing a little and this index trading in a range of greater than 80 points for the second consecutive week.  Consensus thinking is that with the Fed finally hiking rates a little uncertainty came out of the markets.  Of course Janet Yellen’s press conference was still in full swing when market pundits started discussing when the next potential rate hike may occur.

VIX plus Table


The curve depicting the short dated VIX futures contracts flattened out and the Dec 23rd bump moved to the forefront.  The Dec 23rd contract was the only one on the board to settle below 20.00 this past week.  However, there was a trader lurking around both Thursday and Friday who seems to think settlement will be in the 20’s on the open this Wednesday.

VIX ST plus Table


On Thursday morning I came across a buyer of the VIX Dec 23rd 20 Calls at 0.80 who was also selling the VIX Dec 23rd 22 Calls at 0.40.  This was all going on while VIX was around 19.00 and near the low of the week.  On Friday the 20 Calls that settle on the open this coming Wednesday were continuing to get some love as almost 24,000 traded.  Some were pure purchases and other trades consisted of selling the 23 Calls.  Regardless of the structure someone is looking for volatility to remain high, at least for the first part of the coming holiday week, despite this being a holiday week.



As a final note the call open interest for VIX Weeklys is truly impressive.  Doing quick math the open interest for the Dec 23rdCall side of the board was over 130,000 contracts.  That’s impressive, but even more so when we are entering the holiday season which is supposed to be a time of focusing on family and not volatility.

Volatility Indexes and ETPs Last Week – 12/20/2015

Finally, the Fed raised rates.  I’m reading Ben Bernanke’s book and it is interesting that this was being debated when he was still the chairman.  The equity market loved it and then hated it with the result being a roller coaster of a week.  The VXST – VIX – VXV – VXMT curve was on heightened alert this time last week and returned to normal to end the week.  It is rare, but we seem to have experienced an earnings like volatility crush in SPX volatility in reaction to the Fed announcement.



Despite all that volatility last week the short funds were up (SVXY +4.52%) and the long funds dropped.  This is a function of VIX futures finishing the week lower and these funds now moving on to own January and February VIX futures.

VXV Table


On Tuesday I was looking for trades in front of the Fed and came across a couple that actually were looking for volatility to remain high to finish the week.  The trades I’m going to talk about are both 2500 lots so I’m guessing it is the same guy or girl on the other end.  Early Tuesday with VXX at 20.85 there was a seller of VXX Dec 18th 20 Puts at 0.63 who purchased the VXX Dec 18th 19 Puts for 0.27 and a net credit of 0.36.  VXX went up and then came back down and near the end of the day another trade in the same options of the same size took in a credit of 0.41.  The price action for the full week in VXX shows up below.

VXX Chart


About 24 hours after the second lot the Fed did its thing and VXX dropped as the stock market rallied.  VXX did bottom out for the week and finished at 21.77, safely in a place where all options expired with no value.


It is no secret that I am a big fan of vertical spreads.  This week’s trade is a great example of how defined risk and reward that is associated with a bull put spread makes it easy for a trader to stick with a conviction.  A player long VXX, with no hedge, may have panicked as VXX broke 19.00.  A seller of a put spread may not be particularly happy, but they have a defined loss and it is easier to stick this out.


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