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>
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.
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.