Contango is undoubtedly the prime factor in determining UVXY’s price path, but there are many misconceptions about how this works and its true impact.
Contango isn’t gameable
Many postulate that since the daily roll happens at the end of the trading day, simply being long or short the shares before and then closing the trade after will net you the proceeds of the day’s roll.
Contango’s effect is cumulative
It takes a complete cycle of 20 or 25 daily rolls to move 100% of the contracts used in the benchmark index from month 1 to month 2. This means that no matter how large or small that days’ contango or backwardation is, it only affects 4 or 5% of the benchmark. A run of 10 days’ backwardation of 5% is usually outweighed by the level of contango for the remaining 10 or 15 days.
Contango only represents potential
The difference between the mix of contracts that make up the benchmark, also referred to as VX30, and spot VIX is the potential distance the futures could move. The reality is that VX30 tends to move towards VIX by the same degree that the daily roll moved VX30 away from VIX.