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Market Measures

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/VX Term Structure: Expected vs. Actual

Market Measures

In today's segment, we look at the present and historical term structure of /VX to see if we can validate our approach of selling IV.

In low volatility environments and a rising market, /VX contracts start at a higher price and drop as the life of the contract goes on. The current /VX curve is in contango, meaning that as the time to expiration increases, the futures trade at a higher price. The current term structure is projecting contracts to decline by 39% from the furthest out to the nearest expiration. This is the steepest projected decline we’ve seen all of 2017.

Since the beginning of 2016, the VIX futures term structure understated the actual movement of the individual /VX contracts. When we compare the projected futures curve decay with the actual decay of the individual contracts, the term structure tends to undershoot the actual decay.

So how can we incorporate this information into our trade entry? Tune in as Tom and Tony interpret the results.

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