VIX: Could somebody explain this discrepancy?

Optionpro007

Optionpro007

Enclosed please find pics for the VIX Index and the front month contract charts.

They look so different.

My system has signaled a possible long on this instrument (the index), but after looking at the charts of the delivery months....it's just crazy.

I have not seen this type of discrepancy in other instruments.

Could somebody elaborate ?

Thanks a million !!!

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=976496>
 

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There is a large contango on the back/front months and cash. Volatility futures mimic option vega -- the term structure of volatility futures carry +convexity as do the back month options in terms of vegas.

The futures rapidly converge to cash as expiration approaches, hence the divergence seen on the charts.
 
Thanks riskarb ! Always appreciate your generosity.

I had understood the convergence that happens between cash and front months, but I had never seen something so out of proportion.

Is this something that only happens with the VIX ?

The cash chart is showing an uptrend, but the front month just broke through support in a clear downtrend.

If the front month is a good short, but the cash is not even close to confirming taking such a position, following the front wouldn't make sense, correct?

Thank you very much again.


Quote from riskarb:

There is a large contango on the back/front months and cash. Volatility futures mimic option vega -- the term structure of volatility futures carry +convexity as do the back month options in terms of vegas.

The futures rapidly converge to cash as expiration approaches, hence the divergence seen on the charts.
More...
 
Quote from optionpro007:

Thanks riskarb ! Always appreciate your generosity.

I had understood the convergence that happens between cash and front months, but I had never seen something so out of proportion.

Is this something that only happens with the VIX ?

The cash chart is showing an uptrend, but the front month just broke through support in a clear downtrend.

If the front month is a good short, but the cash is not even close to confirming taking such a position, who should I follow? This is crazy isn't it?

Thank you very much again.
More...


The futures have traded under cash which is predictive of a continued drop in VIX in the next session or two. Any sustained backwardation would only be seen in scenarios with a high cash VIX value, say above 20 or so. I wouldn't follow the futures chart unless you're intent on trading arbitrage. There is no "clean" method of isolating the strip-vol, thus no spread-trade will result. Don't look to buy the backwardation unless you're bullish on vol, directionally.

I would ignore the futures and base your analysis on the cash index.
 
Will do.

Thanks !!!


Quote from riskarb:

The futures have traded under cash which is predictive of a continued drop in VIX in the next session or two. Any sustained backwardation would only be seen in scenarios with a high cash VIX value, say above 20 or so. I wouldn't follow the futures chart unless you're intent on trading arbitrage. There is no "clean" method of isolating the strip-vol, thus no spread-trade will result. Don't look to buy the backwardation unless you're bullish on vol, directionally.

I would ignore the futures and base your analysis on the cash index.
More...
 
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