The VXX fell 2% today while the VIX fell 11%. Confused? You are not alone. Yesterday we highlighted the spread between the spot VIX and VIX futures; the VXX and all short-term volatility futures ETFs hold the first two months of VIX futures.  At the close yesterday spot VIX was significantly higher than the near term futures, and as the VIX fell today, it merely closed that gap and settled below VIX futures, which is the typical structure.

The front month futures contract fell 5%, while the April contract fell around 2%, restoring the typical contango structure, and the negative roll that the VXX has when converting daily the 1/20th of it’s front month contract on to the next month. If spot VIX falls further, then this roll will steepen, and the VXX will face a significant headwind.

It should be noted that the VIX here is by no means elevated historically, as the median VIX for this date in the March opex cycle is around 19.

Amazing how many knuckleheads on CNBC were claiming that the VIX was no longer relevant. These are the types that tell you that “volatility is here to stay” during volatile periods. Neither statement is remotely correct; the VIX is merely a statistic, with mean-reverting characteristics. It was never going to stay at 12 forever, just as it won’t remain at 35 either when it gets there.

If Washington makes a deal on the sequester, and Italy fades into the background, equity markets will probably refocus on economic data, which in the face of tax increases and higher gas prices, seems to be hanging in there. New home data today was quite strong. The consumer is now in focus, as a tide of retail earnings and guidance has begun. If the S&P resumes its typical seasonal strength into March, it is quite possible the VIX will fall back below 15.

Long VXX Apr 19 puts at .30.

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