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 S&P 500 Implied Volatility (VIX) and 33% higher than actual realized volatility over the past 3 months (HV63).
- HV63 has fallen to 11.15, which is 14% lower than spot VIX
- The first month and second month (M1-M2) are in contango with a spread of -0.95, giving VelocityShares Daily Inverse Short-Term VIX ETN (NASDAQ:XIV) a slight bullish bias
From the information above you can see that M1 is still overpriced when compared to forward volatility (VIX) and historical volatility, meaning that there is still perhaps 10% upside for XIV in the near future.
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 trade to be justified.
On the other side there is the theory that since VIX is so low it makes sense to be long iPath VIX Short-Term Futures (NYSEARCA:VXX) . 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 my 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: do 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.