Week in Volatility

Market rose from Monday to Thursday, and fell hard on Friday. This created a very interesting movement in the VIX term-structure: first - VIX index closed above the front month futures, second - front month futures rose, as back months fell (week to week). For me that means that market is still expecting VIX to go lower, while risk premiums fell across the months. This should put less of a negative bias on VXX returns as term structure is now much flatter than week ago.

Such particular term structure help explain something about VIX futures: there are two factors that control shape - expectation of the VIX movement, which can be positive or negative, and risk premium, which is always positive. This allows for much flexibility in term structure, such as the one we saw on Friday.