Consistent with last month’s model commentary, I believe VIX futures' high contango and roll costs are creating attractive short opportunities in Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures (VXX) and Barclays Bank PLC iPath S&P 500 VIX Mid-Term Futures (VXZ).
So far this year, the VIX futures term structure has remained steeply upward sloping. This generates high roll costs for VXX and VXZ as they maintain their mandated weighted average exposures.
However, 1st and 2nd month (Short-Term) VIX futures and the VIX index are near all-time lows. As a result, the upside is more constrained than the downside for VXX (VIX Short-Term Futures), as volatility has historically shown to be a mean-reverting asset class.
Looking higher up on the term structure to the VIX Mid-Term Futures, these futures are closer to the VIX index’s historical mean-reverting value. As a result, during a spike in the VIX index, VIX Mid-Term Futures (VXZ) can increase less than VIX Short-Term Futures (VXX). Although the Mid-Term Futures’ roll costs are less than the VIX Short-Term Futures (i.e. less upside), VXZ downside risk is considerably less. Therefore, I will only maintain a short position in VXZ.
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