PSA: For short vol trades, contango is only part of the story

I keep seeing a lot of posts talking about contango as though that is the sole determining factor of a profitable short vol ETP trade. Note that contango only stacks the deck in favor of short vol ETPs. Contango itself is not responsible for their performance.

What actually drives the profitability of XIV/SVXY is the roll-yield - the perpetual trend of the near-term VIX futures to converge to spot VIX. Nice high contango between M1 and M2 generally implies that M2 will fall faster to M1 and M1 will fall faster to spot, resulting in a higher-roll yield over any given period, but this is not always the case.

Note that both last week and again today we are seeing big drops in short vol ETPs that are NOT the result of backwardation, but rather a shift in the entire vol curve in the upward direction. That is: Spot VIX, M1, and M2 all moved up. When this happens, even though the contango between M2 and M1 (or M1 and spot!) is preserved, short vol ETPs still take huge losses.

TL;DR: Don't just look at the shape and slope of the vol curve, look at the shift of it as well.

(yes, technically M1 was slightly backwardated briefly last week, but most of the short-vol ETPs were over 85% weighted to M2 so that wasn't really a factor).