Does It Take Two to ConTango?

Prior research suggests that the slope of the VIX term structure conveys nearly all information about the price of variance risk. In contrast, I find that the time-varying shape of the VIX term structure, determined by the combination of the slope and curvature, embeds price information for variance risk and predicts the excess returns of variance assets, like S&P 500 straddles. I show that a simple managed S&P 500 short straddle portfolio that dynamically adjusts the exposure to variance risk based on signals from the shape of the VIX term structure generates a significant annualized variance-risk-adjusted alpha of nearly 20%. Trading results for various maturities indicate that my findings are particularly pronounced for the short end of the term structure. Robustness checks alleviate concerns that my findings are driven by, e.g., the crisis period, high volatility periods, or variations in option market conditions.