Timing Volatility with the VIX Term Structure

Discussing the Research and Testing Slope-Based Signals

Introduction

The volatility risk premium, often defined as the difference between implied volatility and expected realized volatility, is typically positive but occasionally experiences sharp reversals. As a result, investors seeking to harvest this premium by maintaining short volatility exposure may be exposed to substantial drawdowns during market stress, unless such positions are actively risk-managed. This return asymmetry has motivated a growing body of research on timing volatility exposure more effectively. Among the most robust signals identified in the literature is the slope of the VIX term structure, which captures the relative pricing of near- and longer-dated implied volatility.

Whether measured using cash-based indices or through the basis between VIX futures and spot VIX, the slope has been shown to provide valuable information about future returns on volatility-linked instruments. In this post, I discuss key academic papers on this topic and test the performance of slope-based signals applied to volatility ETFs, using both binary and continuous implementations. The results suggest that these strategies deliver strong standalone performance with low correlation to equities, offering meaningful diversification benefits for investors.