VIX Term Structure, It’s the Slope That Matters

One topic that consistently confuses people is VIX curve structure.  It’s not just the level; it’s the slope that matters.  Let’s look at two curves with very similar underlying VIX prices.  I the difference might be clearer.

On March 21st, 2013 the VIX closed at 13.99, .40% more than where the VIX is trading today.  The two dates also share a similar number of days to expiration across the different contract months.  Notice the slope of the curve in the front two contract months:

vol1

The April future was trading at a 1 point premium to cash, the May future was trading at a 1.25 premium to April.  A steep contango.  Over the next few weeks what did the market do?  It sat in place or went up almost every day.  Then last week happened and something changed.

This is the curve as of 3 pm EST yesterday.

vol2

Notice that May is trading at a similar premium to cash, but that June is barely trading higher than May, only about .85.  What does this mean?  I think it points to how much the market has shifted in the last week.  Traders think the cash VIX could go higher in the near term, but will probably hover closer to 15-15.5 than 14 or 18.  That would explain why the curve would act this way.

My thoughts,  while May is trading at a big premium to VIX it is not trading at a big discount to June, thus traders think the VIX could hover closer to 14 than it has over the 1st few months of the year.