The Archives

Bill Luby, of VIX and more, recently pointed out that the 1st / 2nd month volatility futures had recently set a record (now 70 days) for continuous time spent in backwardation—where the value of the 1st month is higher than the 2nd month.   Not just a trivia question, this condition has been feathering the pockets of those holding volatility ETNs like VXX / TVIX, and picking the pockets of  those holding inverse volatility ETNs like XIV and SVXY.   Is this backwardation record a harbinger of structural changes in volatility futures, or is it just the normal response to a market correction?

Just visualizing the history of contango, starting when volatility futures started trading in March of 2004  is not an easy task.  It has two dimensions of time: the term structure of the volatility futures on a given date, and the variation of that term structure over time.  Obtaining the raw data itself is not trivial.  The CBOE provides volatilty futures data back to March 2004 on their web site, but it is in the form of 95 (!) different spreadsheets, and it is incomplete because not all months traded for the first several years.  To get a full data set back to 2004 required a considerable amount of interpolation / extrapolation.  If you are interested in obtaining the spreadsheet that consolidates all this data see this post.

The graphs below focus on the front two months of volatility futures.  The first covers from 2004 to the present.  I have quantified the contango as the percentage difference between the 1st and 2nd month, with the 1st month being the reference.  Negative values indicate a contango state, positive indicates backwardation.

VIX and 1-2 month volatility futures compared, with contango, click to enlarge

A couple things jumped out at me when I saw this graph. First of all, at a 10,000 meter level, first month volatilty futures do a good job of tracking the VIX index.  Certainly they don’t track well during the most volatile periods of VIX, but during the quiet times they are within a few points.  Second, the other than few days in Dec 2008/Jan 2009 the 1st and 2nd month futures were in contango for a long time (128 days) during the 2008/2009 bear market.   Not surprisingly, the graph shows that most of the time, volatility futures are in contango

This next graph zooms in on our current situation, starting in July 2011.

Fall 2011 Contango, click to enlarge

In the Fall 2011 correction the futures lagged the VIX, but more recently have caught up.  The  2nd month futures usually lag both the 1st month futures and VIX.

At least for 1st and 2nd month futures the term structure seems to be behaving like it did in the past.     Next I’ll look at the medium term ( 4 to 7 month) futures to see how they have behaved.

Evidently the folks at VelocityShares decided that the shares of their inverse volatility offerings were way too pricey, because they are splitting their short term fund, XIV ten to one, and their medium term fund, ZIV by eight to one.  Based on today’s closing prices of 167 for XIV and 132 for ZIV, they will both end up priced at around $16.50 after end of trading this Friday, June 24th, when the splits become effective.

This move strikes me as a strategy shift to broaden the appeal of the funds.  They were introduced last November at around $100/share—not exactly cheap.

As long as an equity stays above $10/share I don’t much care what the price is.  I’m looking for percentage moves.  I question whether splits like this make much difference in the market.  It will be interesting to monitor the volumes, spreads, etc., to see what the effects are.

For more information about these splits, see this news release.

.

It looks like someone big thinks the market is going to have a upswing today—buying 100,000 shares of  XIV in pre-market at 159.85 ($15.985 million).  It could have been a sale, but I doubt it.

The exchanges show XIV trading  over a million shares before market open today, but I’m assuming that’s an error because the only big trade that shows up is the 100,000 share block.    If the volume number is correct it would be XIV’s first day with over a million shares traded. Reaching the 1 million share mark for the first time in pre-market would probably be unprecedented in the relatively short history of ETF/ETN type equities.

In other volatility related events,  the June VIX options expired yesterday, with a settlement price (VRO) of 19.73 and the VIX index opening at 19.31.   July VIX options won’t expire until July 20th—it is one of those times when they expire later in the month than the equity options.   For tickers on VRO, VIX, and other  related volatility related products see volatility tickers.

.