Opportunities in Disconnects in Term Structure of VOLQ Versus VIX

I was recently on a panel with some real smart folks talking volatility. One of the other panelists, Scott Nations, pointed out that while we were talking the October VOLQ future was at a premium to the spot index, while the October VIX future was at discount to spot VIX. Simply stated, VIX was in backwardation while VOLQ was in contango. I thought this was a bit surprising and assumed this was uncommon. Just to make sure we put pen to paper and found the curve shape for VOLQ and VIX have differed frequently enough to discuss in this space.

First, our method was to compare the front month future to the spot index until the Friday before expiration. On that date, we rolled to the next month future. Our timeframe covers the first nine months of 2022 or 188 trading days. The statistics below are highlights of our findings with respect to each individual market.

Data Sources: Bloomberg & EQDerivatives Calculations

Through the first nine months of 2022, the front month VOLQ future has closed at a premium to the spot index just over 76% of trading days while the VIX front month future closed at a premium to the spot index just under 70% of the time. That does not appear to tell much of a story. However, when we look at the instances where there is a divergence between the two markets the results are a bit more interesting.

Data Sources: Bloomberg & EQDerivatives Calculations

We found that in just under 15% of trading days in 2022 VOLQ closed at a discount to the front month future while VIX closed at a premium to the future. Conversely, 8.51% of the time VIX was at a discount to the front month future while VOLQ was at a premium. This is just under one in four trading days, although the observations tend to cluster a bit.

Whenever we run numbers the thought, “How does this help traders” is always considered. In this case, there are a few immediate thoughts that come to mind. First, it may make sense to combine the two for a pair trade, for instance selling the future that is at a premium to the index and buying the future that is at a discount. Another idea, specific to directional outlooks, is if a trader is considering a long volatility position, look to the future that is at a discount to the index and if they are considering shorting volatility look to the market where the future is at a premium. Also, remember that VIX and VOLQ options price off their future and not the spot index. Therefore, by association there may be option strategies that favor one market over the other. Finally, traders for years have considered an equity market outlook based on the shape of the associated volatility term structure, there may be some work to do when considering trading SPX, NDX, or the relationship between the two.