vix term structure

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VIX Future Term Structure Widened Significantly

Posted on 3/24/2011 in Trading & Technology by Mark Sebastian

VIX Future Term Structure Widened Significantly

In a which came first the chicken or the egg scenario, when it comes to VIX and SPX, the answer might be the Chicken.  And by that I mean, VIX futures, which predict forward volatility began to see a major widening of their term structure in the front two months, namely April falling well under May.  At the same time the SPX spread widened but not to the extent the VIX did.  This is a snap shot of yesterday closing VIX option prices:

Based on the closing prices the VIX April Future Priced at 21.50, the May Future priced at 22.20 (if this confuses you read this blog post).  This is a term spread of only .7% in VIX futures terms essentially flat.   I could have showed this in my blog yesterday about calendars as further evidence of continued fear.  Today, if we look at SPX calendars the structure has changed:

Notice April is now well below May, and that overall IV fell.  A calendar done this morning was a nice winner by day’s end. Following this path, we can see that April is expected to fall even further below May as the VIX future's term spread widened out.  Looking at today's closing prices:

We see that the April future fell a full 1% to 20.5, while the May future fell far less significantly to 21.60.  Thus we saw a widening of the April-May spread to 1.1%. Considering April ATM in the SPX is only .6% below May, I expect SPX April to drop further.  Thus, it could be that the Chicken (VIX Term Structure) is coming before the Egg, SPX term structure.

What does this mean to you option traders:  I am guessing that the IV skew in April is going to start falling from here, those that like to play low probability condors might see some action (I do not love that spread), This also could mean that flies may start not to look awful, I do not expect May IV to fall at the rate April is coming in at, but it is likely to fall none-the-less.  For those that like playing the VIX ETN's I think there is going to be an even further widening of the roll, this could present some lucrative possibilities

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