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I had a really great back and forth exchange today with a member who noticed the somewhat strange price action yesterday between the XIV and the ZIV.  Great catch on that by the way, and at least early on today a similar discrepancy is happening.

Remember the XIV derives it’s price based on the 1st and 2nd month of the VIX futures term structure, and the ZIV from the 4th to the 7th month.  And while the VIX futures usually track reasonably well across the months, there are times when one part of the curve is moving and other parts aren’t.  We saw that yesterday.

You can see the blue line from Tuesday and then the black line from yesterday, and most of the movement happened further out in time  (further to the right)

Now I don’t like to talk about politics, but in the context of this explanation what happened was the debt ceiling worries that were causing the VIX futures to be elevated were resolved when they essentially kicked the debt ceiling fight down the road a few months.  It was just a replacement of short term worry with medium term worry that’s all.

The curve is still fairly steep in contango and the signals are all fine still, but this is just to illustrate for those that are interested why the XIV and the ZIV are actually different products that focus on a different part of the curve.  There is definitely a correlation here, but it’s not 1 : 1 and I also trade both of my volatility strategies differently as well.


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