Today's VIX Futures Term Structure: A Contango with Insights

As of today, the VIX futures term structure reveals an ongoing contango condition, as seen in the chart.

The front month (October) futures contract is priced at 20.95, higher than the VIX Index (spot VIX) at 20.78. As we look further out in the curve, futures for November through May decline initially, bottoming out around December, and then start rising again, though still lower than the October contract.

Key Takeaways from the Current VIX Term Structure:

1. 1. Contango Condition: The term structure shows a contango, meaning that the further-out futures contracts are priced higher than the nearer months (except for a slight drop from November to December). This condition often signals a period of relative calm in the markets, with no imminent fear of volatility spikes in the near term. The market expects volatility to gradually settle down as we head into the end of the year, but increase slightly again in early 2025.
2. 2. Potential for Carry Trade: Contango is beneficial for volatility-related Exchange Traded Products (ETPs) like VXX or UVXY when used in short positions. Investors taking advantage of the roll yield from the decline in futures prices as they converge to spot VIX can profit from the natural decay of VXX over time.

3. No Immediate Fear: The relatively high October future indicates that there is still some short-term uncertainty, possibly due to upcoming events such as earnings seasons or geopolitical risks. However, the fact that futures dip in November and December shows the market does not anticipate this uncertainty lasting long.

4. Rising Long-Term Volatility Expectations: Starting in December, we see a slow rise in futures prices through to May 2024. This may reflect concerns about early 2025 market conditions, such as macroeconomic factors, potential rate hikes, or political uncertainties as we approach the U.S. elections.

What This Means for Traders:

• Short-Volatility Traders: The current contango structure offers an opportunity for those employing short-volatility strategies, like selling VXX or buying SVXY, to capitalize on the roll yield. However, caution is advised, as sudden spikes in volatility can cause sharp reversals in contango situations.
• Market Sentiment: The relatively low near-term futures prices suggest that market participants are not expecting large market shocks or surges in volatility in the immediate future. However, the upward slope in 2025 indicates that uncertainty may increase after the start of the year, especially as key macroeconomic events unfold.

So, today’s VIX futures term structure suggests a temporary calm in the market with an expected decrease in volatility over the next few months. However, as we look into 2025, there is a gradual increase in long-term volatility expectations, hinting at potential risks or uncertainties building up for the first half of the year.

For those managing portfolios or trading volatility instruments, the current term structure offers insights into both potential opportunities and risks in the market.

This contango, coupled with stable near-term expectations, is a window for short-volatility strategies but requires careful monitoring of the curve for any sudden shifts that could signal market disruptions.