In periods of stock market stress, the near VIX contracts rally much faster than the deferred contracts. When equity index products begin to decline people grab for the near contracts, pronto. It’s like the Simpson’s episode when Homer Simpson is trying to buy a handgun, and the shop keeper tells him there’s a delay of several days due to background checks, and Homer says, “But I’m mad now!” Well the near VIX contracts convey the same message: I’m scared now!
Below is a chart of the 2nd vs 4th VIX contract spread. This is a rolling spread, currently represented by July and September contracts, with July 16.35 and Sept 17.45 [as of Tuesday morning, ref SPX 2075]. So the spread is currently -1.10, with the July contract trading at a discount. From the chart one can see that in October of 2014, December of 2014 and January of 2015 the spread went positive, denoted by green spikes in the chart’s lower panel.
On a long term basis, this appears to be a decent value, especially given weakness in the Dow Jones Composite (new lows for 2015 as of Monday), and especially in the Dow Transports, which are down 10.8% from the beginning of the year. I would look for a near term objective of around -0.30 on this spread, which was last achieved in March when the SPX had declined to 2045 (about 30 points lower than the present level).
