VIX In Shark Fin Formation

If you’ve been following implied volatility as long as I have then you know that backwardation is incredibly uncommon in the VIX futures curve. For the uninitiated amongst you, a futures curve or futures term structure is produced by drawing a graph comprised of a time window snapshot of two or more futures contracts of an underlying asset, e.g. crude, gold, pork-bellies, or in this case the VIX.

The ‘normal’ state of affairs in the VX futures is contango which is a nerdy insider term that most people I’ve met seem to be incapable of explaining properly. In a nutshell contango means nothing more than that the front month contract trades at a discount to the 2nd month contract, which in turn trades at a discount to the 3rd month contract, and so on.

Backwardation as you probably suspected is the exact opposite. The front month contract trades at a premium to the 2nd month contract, which in turn trades at a premium to the 3rd month contract, and so on. This is the very situation we faced starting in March of this year and since then things have gotten even messier.

While most people scratch their head trying to figure out all that terminology someone out there has been banking mighty coin by taking advantage of the so called ‘roll yield’ inherent in backwardation which benefits savvy participants holding higher priced nearby contracts and ‘rolling’ them each month into lower priced more distant contracts.

Until now that is as the roll yield racket just got a LOT more complicated. I am proud to introduce you to the new VIX Futures Shark Fin Formation (VFSFF^®) which is guaranteed to make a quick meal out of any hapless options traders unlucky enough to enter its waters.

In all seriousness though, this is very important information we need to take seriously from a trading perspective, which really is all that matters. For one – if you cancel out Sept, Oct, and Nov then we are still in backwardation. Given that equities are three quarters into recapturing their all time highs (with the NDX already far above) this casts a bit of doubt as to whether we are truly back to conducting ‘bizns as usual’.

Let’s not forget that most of this rally is driven buy big tech. My own ‘monsters of tech’ composite has pushed into the stratosphere but does not seem to be running out of oxygen anytime soon. Will there be a pullback? Yes most likely but that’s something many already suspected several weeks ago, so be careful stepping in front of this speeding freight train.

Here are the E-Mini S&P futures, which incidentally are rolling over today along with all the other E-Mini contracts (e.g. NQ, YM, and RTY). Talking about a v-shape recovery, someone should have send a memo to main street as well, which still is smoldering in many parts of the U.S.

To widen our general perspective let’s revisit some major major market verticals below the fold:

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