“It is possible that these funds have created a class of investors that are long-only VIX futures, impacting the market,” added Lawrence Schulman, chief executive at Cheiron Trading, in the report.
When VIX futures are in contango, the volatility products lose money on the trade when they “roll” the contracts before expiration to maintain exposure.
“The action in the exchange traded products may be helping to drive that steep contango,” wrote Chris McKhann at optionMONSTER in a recent report.
“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.
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
