Maneesh Deshpande and Samuel Vazquez Ph.D. teamed up at RMC for a presentation titled The Evolving Dynamics of VIX Futures. Deshpande is a Managing Director and Head of Americas Equity Derivatives Strategy at Barclays and Vazquez is a Vice President and Quant Strategist from Capstone Investment Advisors.
Deshpande started things off discussing the VIX Term Structure noting contango is more common than backwardation. His description as to why we spend more time in contango than in backwardation was a comparison of owning VIX futures to holding an SPX Put option. He notes that buying the VIX future gives a holder exposure to convexity and the cost is more associated with that exposure is the roll down of VIX futures pricing as opposed to a premium paid for an SPX put. He noted that the introduction of VIX ETPs has influenced the steepness of contango over time – increasing it with long funds and the short funds resulting in a bit more balance.
Vasquez took over discussing the anti-correlation between VIX futures and the S&P 500. He demonstrated that the one year correlation is currently the most negative in history. He interprets this as meaning that the majority of moves of the VIX and VIX futures have been influenced by what is going on in the stock market. A final very significant point was that since 2011, due to short VIX ETPs, the premium levels that one should receive for being short VIX futures has diminished.