An interesting dichotomy is shaping up in the VIX complex.
On one hand, the premium between VIX futures (30-day constant maturity) and the VIX spot stands at its highest level in more than 2 ½ years. That’s generally been a good thing for the inverse VIX play (ex. short VXX or long XIV), because historically it’s meant VIX futures were overpriced (as opposed to the spot being under-“priced”), which has over time put pressure on futures to fall.
On the other hand, the VIX spot is selling at significant discount to historical vol. That’s generally been a bad thing for the inverse VIX play, because historically it’s meant the VIX is underestimating future realized volatility, which has over time put pressure on the VIX (and VIX futures) to rise.
You can see historicals on all of these relationships in our post Four Graphs to Rule Them All.
There are of course multiple ways to measure historical volatility, but using what’s probably the most commonly cited in this context: the 10-day annualized std. dev. of the S&P 500, there have only been two previous instances where the premium between VIX futures and the spot was as high as it is today, and at the same time, the discount between the spot and historical vol was as low.
The first was in late-2011 and the second in mid-2012. In both instances, like today, the VIX was falling following a recent spike. And in both instances, VIX futures were lower (and XIV/ZIV higher) a week and month later.
What do these two incidents say about the current state of the VIX complex? Likely nothing. Two observations do not a robust conclusion make.
But the current dichotomy in the VIX complex will be interesting to watch in the coming week(s). My best guess is that the premium between futures and the spot wins the day, XIV/ZIV falls, and we find that all of those measures showing elevated historical vol were based on fears that are no longer a factor (ex. our most recent FRB meet).
Click to see Volatility Made Simple’s own elegant solution to the VIX ETP puzzle.
Volatility Made Simple