VIX futures rolled over today with February futures expiring and March becoming front month. With March as front month the situation looks like this (data can be found on my market data page):
- Front month futures (M1) are 13% above spot VIX and 33% higher than actual realized volatility over the past 3 months (HV63).
- Actual volatility over the past 30 trading days (HV30) has dropped to 9.93, which is 30% lower than spot VIX
- The first month and second month (M1-M2) are in contango with a spread of -0.95, giving XIV a slight bullish bias
- The 4th and 7th month (M4-M7) are in contango with a spread of -1.8, giving ZIV a bullish bias
From the information above you can see that M1 is pretty overpriced when compared to forward volatility (VIX) and historical volatility, meaning that there is still room for XIV (inverse short-term VIX futures) and ZIV (inverse med-term VIX futures) to move higher.
However, now that we are halfway through the 7th straight week of gains on the S&P 500 and VIX futures have pressed down to levels not seen in over half a decade, I'm not finding the risk/reward in my typical XIV and ZIV trades to be justified.
There is the theory that since VIX is so low it makes sense to be long VXX (short term VIX futures). This may seem like a good idea but it is in fact a money loser 90% of the time for reasons I've previously explained here.
I've posted several trades on this blog (two January and one February), which at 13.4% have returned roughly twice that of the S&P 500 this year. At this point I feel there is little reason to chase gains at multi-year S&P 500 highs.
Which leaves me with option 3: doing nothing. I believe that you don't always have to be in a trade and it is necessary to patiently wait for an opportunity where you have a good setup. Stay tuned.