Why are VIX futures in contango?

The fact VIX has a very large contango (right now a % carry of 10%/month) has to do with rational risk premium. The net supply of stocks is 1, so on net investors are long the stock market. They want to hedge this risk by going short, so they buy VIX futures (which are correlated -0.7 with the stock market).

Does VIX have contango?

Leveraged ETFs on the VIX, crude oil, gold and even the S&P 500 all fall under contango pricing. However, certain instruments like VIX products and leveraged ETFs state the objective is to mirror the “one-day performance” of the underlying index or commodity.

What do VIX futures indicate?

The Cboe Volatility Index, or VIX, is a real-time market index representing the market’s expectations for volatility over the coming 30 days. Investors use the VIX to measure the level of risk, fear, or stress in the market when making investment decisions.

Does VIX predict future returns?

VIX has more often than not proved to be an over-estimate for future volatility, measured by next realized volatility. Source: S&P Dow Jones Indices LLC and CBOE. Chart is based on VIX levels and their corresponding S&P 500 recent volatility levels on each trading day.

Is contango good?

Contango tends to cause losses for investors in commodity ETFs that use futures contracts, but these losses can be avoided by buying ETFs that hold actual commodities.

What is contango and backwardation?

Contango and backwardation are terms used to define the structure of the forward curve. When a market is in contango, the forward price of a futures contract is higher than the spot price. Conversely, when a market is in backwardation, the forward price of the futures contract is lower than the spot price.

What is iPath B S&P 500 VIX?

The iPath® Series B S&P 500® VIX Short-Term FuturesTM ETNs (the “ETNs”) are designed to provide exposure to the S&P 500® VIX Short-Term FuturesTM Index Total Return (the “Index”). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection.

What is a contango market?

Contango is a situation where the futures price of a commodity is higher than the spot price. In all futures market scenarios, the futures prices will usually converge toward the spot prices as the contracts approach expiration. Advanced traders can use arbitrage and other strategies to profit from contango.

Is contango bullish or bearish?

You need to be familiar with a couple technical terms related to movements in the commodity futures markets if you want to successfully trade futures contracts. (Even by Wall Street standards, these terms are kind of out there.)

How do you profit from contango?

Traders with access to both physical oil and storage can make substantial profits in a contango market. A contango is a situation where the futures price of a commodity is higher than the spot price. Another way for traders to profit off a contango market is to place a spread trade.

What does it mean when the VIX is in contango?

In case of the VIX, it is when near term VIX futures are cheaper than longer term VIX futures, like the example below. Contango can be interpreted in the way that the market expects the VIX index to increase from its current level going forward.

When is the VIX futures curve most contango?

VIX futures contango is typically sharpest when the spot VIX Index is very low. The opposite situation, when near term futures are more expensive and futures curve is downward sloping, is called backwardation.

When is a futures curve upward sloping is called contango?

When a futures curve is upward sloping from left to right, it is called contango (we say that a market is in contango). In case of the VIX, it is when near term VIX futures are cheaper than longer term VIX futures, like the example below.

When does backwardation occur in VIX futures market?

Backwardation is less frequent than contango in VIX futures, but not uncommon. It typically occurs when the spot VIX index spikes and the market expects volatility to decrease again in the future. In general, a futures curve is often called “term structure”, but it really displays the term structure of the futures market.