{"id":67007,"date":"2020-11-20T12:05:01","date_gmt":"2020-11-20T17:05:01","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=67007"},"modified":"2023-02-10T13:33:33","modified_gmt":"2023-02-10T18:33:33","slug":"vexed-by-vix","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/futures\/vexed-by-vix\/","title":{"rendered":"Vexed By VIX"},"content":{"rendered":"\n

The graph below confuses me.  To be fair, it is a fairly confusing graph if you are unfamiliar with viewing futures curves.  But I look at futures curves all the time.  What confuses me is why the right half of the green line is so flat.  Please allow me to explain.<\/p>\n\n\n\n

Chart: VIX Futures Curves.  Values from Today (green), Last Week (orange), Last Month (blue)<\/h2>\n\n\n\n
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Source: Bloomberg<\/p>\n\n\n\n

First, a note of explanation.  Each futures class has contracts with different expiration dates (January, February, etc.).  When we plot the prices (Y-axis) of each of those sequential classes (X-axis), we get the lines that we see above.  Many of you are familiar with the yield curve, where we plot the yields for a range of bond maturities on a graph.  This is the same concept. <\/p>\n\n\n\n

We can see that the green and orange lines rise from their starting points through January 2021.  That is normal for a futures curve.  In futures terminology, that is called \u201ccontango\u201d. It implies that the current supply of the commodity in question is sufficient, and the rise is usually a function of interest rates.  We can see from the blue line that the opposite situation was in effect.  Prior to the election there was a relative scarcity of volatility protection, and that was reflected in the downward sloping curve.  That situation is called \u201cbackwardation\u201d.  In the case of the CBOE Volatility Index (VIX), we typically see backwardation in nervous markets, and the curve reverts to contango when the perceived crisis is resolved.  With interest rates near zero, it is unsurprising that the back end of the curve is relatively flat. <\/p>\n\n\n\n

There is little value to be realized from investing excess margin at a risk-free rate, reducing the forward value of futures. <\/p>\n\n\n\n

The part that I find confusing is that the pancake-flat futures curve is stuck so closely to 26.  That is a historically high level for VIX, which has a long-term historical average in the high teens.  A 26 VIX means that the market is estimating that daily volatility is likely to average over 1.5% from late January through the summer.  I am having real difficulty determining why the market is seemingly so nervous about its future prospects.<\/p>\n\n\n\n

I have considered and dismissed the following potential causes for the flat VIX futures curve in 2021:<\/p>\n\n\n\n