Case Study: Irrational Vix Futures Pricing

In this particular case, VIX futures have been up in anticipation of a close French election where a far left or far right candidate might garner enough votes to cause a run off election. The proof of this was the selloff in French government bonds relative to German bonds. This possibility would result in a questionable future for the EU as a whole traders believed, after Brexit, since France might decide to modify it's relationship with that body as well.

The issue for traders was they were buying the wrong futures contract! If they were buying /vx it seems they were loading up on April contracts, which expired on the 18th. The election --and for that matter the debt ceiling stuff in the US, the OTHER event which could cause major market turmoil--took place after this contract expired, on the 23 (debt ceiling 29th btw). SO...one would reasonably expect the April contract to decline relative to the May contract by expiration. That is exactly what happened, and a trade selling the April contract while buying the May contract was a profitable one.

The following is the situation on April 13th. Backwardation of 9% occured on April 11th...this is when it peaked, futures continued to rise for 2 days afterwards however.

To trade this, wait until the backwardation peaks and begins to decline, because you never know how high it'll go!

UPDATE: The French election WAS clearly the cause of this aforementioned strange pricing...vix futures snapped back into deep cotango after round 1 results were to the market's liking.