If you trade VIX futures (and if you ever bought/sold UVXY you do) then contango and backwardation periods are important to monitor.
Several analysts over the years have suggested a .90 ratio of the VIX to VXV for detecting contango (under .90) and backwardation (over .90). That ratio chart is presented here with the UVXY/VIX in the background. Why UVXY/VIX? Because UVXY loses value relative to the VIX consistently due to contango. Pull up a 5 year chart of UVXY to see why contango makes it the worst hold there is.
On the whole the .90 rule works - you can see where the UVXY is rising in value relative to the VIX (backwardation) when above .90. This all makes sense - think of VXV as "the 93 day version of the VIX" (vixandmore.blogspot....vxv-ratio-chart.html) and realize that backwardation happens when the distant future seems more certain than the immediate future. So when the VXV (as a denominator) shrinks relative to the VIX (the numerator) we have traders much less certain about the next 30 days than the next 90. Such periods are when UVXY builds value. The UVXY/VIX chart shows such periods to be brief.
EDIT: Just noticed that spikes below 0.80 also result in backwardation of UVXY. Now to figure out why.
Several analysts over the years have suggested a .90 ratio of the VIX to VXV for detecting contango (under .90) and backwardation (over .90). That ratio chart is presented here with the UVXY/VIX in the background. Why UVXY/VIX? Because UVXY loses value relative to the VIX consistently due to contango. Pull up a 5 year chart of UVXY to see why contango makes it the worst hold there is.
On the whole the .90 rule works - you can see where the UVXY is rising in value relative to the VIX (backwardation) when above .90. This all makes sense - think of VXV as "the 93 day version of the VIX" (vixandmore.blogspot....vxv-ratio-chart.html) and realize that backwardation happens when the distant future seems more certain than the immediate future. So when the VXV (as a denominator) shrinks relative to the VIX (the numerator) we have traders much less certain about the next 30 days than the next 90. Such periods are when UVXY builds value. The UVXY/VIX chart shows such periods to be brief.
EDIT: Just noticed that spikes below 0.80 also result in backwardation of UVXY. Now to figure out why.
