Daily Wrap, April VIX Expiration, and VXX Forecast for 4/17

The term structure reverted back to a (slight) contango today with April and May separated by 0.8 points, as seen in the term structure from the VIX Futures Data page.

Since VIX futures roll tomorrow morning I care more about the May and June futures, which are separated by 0.95 points.  This will set up to be a good chance to buy XIV if the market can find any foothold tomorrow. One problem with the trade, however, is that VIX is not really overpriced here. Historical (actual) volatility over the past month is now 13.47, with VIX just 3.7% higher, as shown in the HV vs IV chart:

Sellers of options want to collect a premium that is reflective of historical conditions and future risks and it remains to be seen if traders think that the action in the past couple days was just a fluke. If we can get some calm days in the market, both VIX and HV21 will drift lower, possibly as low as actual volatility over the past 3 months (HV63) which is currently around 11.0 -- ~20% lower than where VIX is currently.

The other risk to the trade is that May futures aren't really overpriced either. At 14.75, May VIX futures are just 5.6% above spot VIX, meaning there is not much buffer to absorb a spike in VIX, making a sharp drop in XIV very possible if the market sees more selling.

In addition to the roll yield of about 1.4% per week on XIV, another positive data point for the trade is that the market is down 1.2% over the past three days while VIX is up 14%. This suggests that the move in VIX may have been overdone, especially if you think the market has already priced in risk from what has happened over the past few days..

Taking a look at the the VXX Forecast for tomorrow (preview), we can see that the roll yield and risk of a VXX spike reflect the numbers discussed above.

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