What is the VIX Futures Term Structure Telling Us?

The VIX futures term structure in this chart illustrates the market's expectations for future volatility based on the pricing of VIX futures contracts for different months. Here are some key insights from the chart:

1. Contango: The upward-sloping line from October to May shows that the VIX futures prices for later months are higher than for earlier months. This condition is known as contango. It reflects that the market expects volatility to increase as we move further into the future.

2. Market Sentiment: The fact that the current VIX (around 15.95) is lower than all the futures prices indicates that investors expect volatility to rise in the coming months. This could be due to anticipated future uncertainty or risk.

3. Near-term Stability: The slight dip from October to December shows that the market expects volatility to remain relatively stable or even decrease slightly in the near term, with a slight increase starting in January.

4. Gradual Increase: The steady increase from January through May suggests a growing expectation of higher volatility in the mid-term, possibly due to anticipated events or shifts in market conditions in that period.

5. Trading Implications: For traders, this contango structure can create opportunities. Products like VXX (which tracks short-term VIX futures) may experience negative roll yield if the market stays in contango, as contracts roll from cheaper to more expensive ones.

Overall, the term structure reflects the market's outlook for gradually increasing volatility in the coming months.

It's a guide for tactical strategies like volatility trading, hedging, and managing risk exposure in anticipation of market shifts.