Question regarding VIX futures and its P&L

CFA Level III Derivatives
#1

Dear CFA fellows,

Could I quickly ask a question about VIX, something I encountered when I was reviewing the Schweser Notes.

For VIX futures, “VIX futures prices and the VIX Index will converge at contract maturity because VIX futures settle against spot VIX at expiration. For a participant who purchases long-dated VIX futures when the market is in contango (the typical situation), the difference between the spot and futures price will decline over time as the futures price moves toward spot VIX at expiration.” Therefore, the conclusion is that the long future position will have loss in contango while short position gains.

How could I better understand this - as in why long will make a loss in contango?

I was thinking in contango, future volatility is higher than now, the VIX future price should increase and the holder (long) should make a profit?

Thank you so much in advance.

#2

I think this is the same as commodities in contango as well. You purchase futures at let’s say 100, then in the future when you need to roll your position, the spot is 95 (so you exit at 95, because your old futures position is now the spot), but if curve hasn’t changed, you enter into a new futures position at 100.

You said “in contango, future volatility is higher than now, the VIX future price should increase” but I am not sure if this is right. In contango there may be an “expectation” that volatility will increase. I believe the VIX tends to be in contango because investors will buy VIX futures as an “insurance” since volatility is typically negatively correlated with equity.

#3

Thank you mate. This is really helpful !

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