Given the nice bounce off the fairly scary back to back volatility spikes recently I’ve had some great questions on the level of contango / backwardation in the VIX futures and whether that’s a signal to buy the XIV.  And this is actually something I’ve seen repeatedly in the last year online, on Twitter etc.  I’d like to try to show first of all why this is a common opinion in just the most recent 12 month period, and then show you why it’s actually wrong.

So first, here’s what the results would have been for a strategy that checked Vixcentral.com every morning and simply followed the VIX term structure since March 1st, 2016.  (That was the last correction in the markets)



So pretty solid right?  No wonder the short volatility trade is getting so crowded this year right?

But now let’s look at the exact same strategy from inception date up until March 1st, 2016:



That is one of the ugliest performance charts I’ve ever seen, and let’s not forget that it took place entirely during a raging bull market.

So while it’s true the past one year has been a crazy year with equity market calmness and low volatility the likes of which we see on average once every couple decades, I would caution people against allowing “recency bias” to affect their trade decisions.

That chart of 2012 – 2016 is the norm.  2016 to present is the exception.

There’s too many people lately who think it’s the other way around, but making trading decisions based on the exception to the rule is probably not a winning long term strategy.  Nobody knows when, but things will return to normal at some point.  Here’s the full chart from inception date until today:

 

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