On Backwardation In The VIX.

Lots of buzz about the large backwardation in the VIX. The "spot" VIX was over 51 at the time; the March VIX future was roughly a 47, July roughly 43.

Now, of course, it's an accurate point. That's the "spot" VIX premium, and it's on the high end.

But here's the rub: It doesn't mean a whole lot beyond what we already know.

The VIX tends to "mean revert." Shorter-term moves one way tend to reverse course and return to some perceived mean. The best definitions of a "mean" are longer-dated volatility measures - or perhaps a moving average of shorter-term measures.

The longer the duration, the less noise, and the more it resembles lasting volatility assumptions. So logically, the shorter-term measure should "revert" to the longer term one.

VIX futures are not volatility estimates, per se. They're estimates of where the VIX will be on a given date. So as a "mean" estimator, they do fine.

So, what's the problem with this analysis?

Two things: One, there's no magical premium of the VIX, beyond a given VIX future, that signals a reversal is particularly imminent. The VIX yesterday at midday was merely 8% above the March future. There's no reason that can't that go to 18%, or even 28%. In fact, the VIX did soar way beyond near-month futures all the way back in October.

Two, a small subset of the time, the VIX itself is the mean, and it's the futures and longer dated options measures (like the VXV, which is the VIX for 90-day options) that move.

Look, I believe the selling in the market is over-extended last week. And I believe that options volatility is too high, based on actual market volatility. So I agree with the premise that the VIX will decline.

But the futures, by definition, are saying the exact same thing. It's just kind of a redundant observation, and not one I would hang my hat on to presage the next rally.