Are futures players frontrunning the VIX?

I use the VIX             / VXV             ratio to monitor VIX             futures for contango/backwardation. A peculiar thing has been happening over the last 2 weeks on this admittedly ugly (but it looks great on a 4k mounted in my office) chart.

VIX             has been rising slowly over last 3 weeks and, more substantively, the VIX/VXV ratio has been rising too. As a result of that ratio rising, long VIX             derivatives have been seeing lower contango rates.

What that all nets out to is that the volatility market is anticipating more volatility than the VIX             itself tries to predict. This anticipation is higher than the March 3 through 17 period even though the VIX             itself is lower right now. What does this mean? It means that the people who trade "what will the VIX             do" are well ahead of those who trade the things (OTM options against SPX             listed stocks ) that make up the VIX             .

That early March period created the range that the SPX             then traded for about 12 weeks. One can assume that traders got comfortable scalping that range which, by sheer math, is something that will lower the VIX             . We may be seeing the same "range setting" going on now. But keep in mind that there is no guarantee that a range will hold - thus the higher "tension" in the VIX             futures that isn't reflected in the VIX             itself.

How to trade it? You can range trade going long the VIX             long futures when the S&P500             is at the top of range (like now) without too much fear of contango chewing your long position if held for 2 sessions or fewer. Shorting the VIX             long futures when the S&P500             is at the bottom of the range won't get you the kind of contango tailwind that such a strategy normally provides.

Also, and this is important, the "tension" here is coming from your more sophisticated traders and algos - volatility futures defy many things, like the Black Scholes equation. If they are betting on a big move, be prepared for this tight range to be blown out.
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