“The action in the exchange traded products may be helping to drive that steep contango because they sell nearer-month futures and buy later-dated contracts. Some market observers contend that these funds and notes of own all of VIX futures,” he said.
“It used to be that steep contango in the VIX futures meant that smart money was betting on higher volatility in the near future, and they were usually right. But since 2008, and especially since the inception of the VIX exchange traded products 2009, the steep contango has not necessarily preceded equity selloffs,” McKhann added.
FT Alphaville on Wednesday reported that with VIX ETNs, the market tries to anticipate issuers’ hedge purchases.
“They are a big enough player in the market, and you know they have to sell the April future and buy the May, and so you will get in front of that,” a trader told FT Alphaville. “It definitely creates opportunities — you have a big player which has to behave in a certain way at a certain time. We know how much they should be buying and selling at the end of the day and it creates predictable large flows which people can trade around.”
Other exchange traded products designed to rise with VIX futures include iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and ProShares Ultra VIX Short Term Futures ETF (NYSEArca: UVXY).
iPath S&P 500 VIX Short Term Futures ETN
