The shape of the VIX term structure contains useful information about the volatility regime.
When the curve is in contango, short-volatility strategies tend to benefit from positive roll yield. When it moves into backwardation, the environment is typically much less favorable.
In an earlier post, “Timing Volatility with the VIX Term Structure”, I tested using the relationship between the VIX and 3-month VIX to dynamically switch between short- and long-volatility exposure. The strategy produced a Sharpe ratio of around 0.6 and, importantly, provided diversification during major equity drawdowns.
But the level of the volatility curve may not contain all the relevant information.
Consider two days on which the VIX curve has the same slope. On one day, the curve may have been steadily steepening over the previous few weeks. On the other, it may have been rapidly flattening. The curve looks identical, but the paths getting there are very different.
This raises a natural question:
Does the momentum of the VIX curve contain information that its current shape misses?
In this post, I test a simple curve-momentum signal and apply it to timing short-volatility exposure. I then compare it directly with the curve-level signal from my earlier work and examine whether momentum contains incremental information after controlling for the current state of the curve.
