Volatility Insights: What Can You Learn From The Big Short Interest In The VIX Futures?

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Volatility Surfer
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Summary

  • VIX shorts are currently near a 5-year high.
  • Spot VIX has been realizing low volatility.
  • There is a better relationship between the net positioning and the market.

I have been a regular contributor on SA when it comes to the topic of volatility. Naturally, I receive a number of questions being posed to me in regards to various topics. However, as of late, I have been getting questions about the heavy short interest in the VIX futures and whether this means anything. Of course, the question can be posed more bluntly. Does the heavy short interest in the VIX futures mean that we are about to see a bout of increased volatility in the near future?

Now I have my opinions and thoughts. However, I also let the data educate me. In this case, I will walk through the historical data on the VIX futures with you and perhaps we can answer some questions, and perhaps we can get some more interesting questions coming out of this exercise.

Now let's look at where the VIX shorts currently stand:

As the chart above shows, the VIX futures have a pretty high short ratio currently. However, what is more interesting is that the relationship between increase in VIX shorts and future underperformance of the market is almost non-existent. Furthermore, when you look at the VIX shorts versus the realized volatility, which is shown in the spot VIX index, there is also a very poor correlation.

Simplistically put, one cannot use the level of short interest as a determinant of future realized volatility based on a five year history.

Now let's look at this a little differently. Let's look to see if there is any relationship between the net positioning in the VIX futures (longs minus shorts) to see if there are any interesting patterns.

This is where an interesting pattern emerges. When the net positioning on the VIX has fallen below 100k contracts, realized volatility on a 1-2 month basis has

This article was written by

Volatility Surfer profile picture
2.03K Followers
Investing since the dot com crash. Searching for a little wisdom every day. I enjoy uncovering quality dividend ideas for my retirement portfolio. With my play money, I enjoy hunting for commodity multi-baggers. Gold and silver bull.

Disclosure: I am/we are long SPY PUTS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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