chart:McClellan VIX above Futures

Courtesy of McClellan Financial Publications

Courtesy of McCellan Financial Publications

Courtesy of McClellan Financial Publications

September 10,2015
 
The August 2015 minicrash caused the spot VIX Index to move up above the price level of all of its futures contracts, which currently extend out to May 2016.  That is another way of saying that the options traders whose actions determine the level of the VIX are more nervous than the VIX futures traders believe is appropriate.
During a protracted uptrend, it can be a wonderful sign of a short term bottom to see such a development.  It says that fear has reached an extreme, and that bottom fishers can do well by taking advantage of the situation.  The chart above shows that if someone had “bought” the market at any of the times when this condition has appeared over the past 3 years (at least prior to August 2015), he would have come out really well on the trade.
But that is only true during an uptrend.  Taking a longer look back shows that during a protracted downtrend, the spot VIX can stay above the level of all of its futures contract for a long time, and it is a really bad idea to bottom fish based on just that criterion.  In fact at one point in the autumn of 2008, the VIX was continually above all of its futures contracts for a period of 3 full months.


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