As I listen to traders belly ache about the ‘low VIX’ ?I ask them, ?why should the VIX be high? ?They will usually point to a bunch of reasons, none of which are in the near term. ?Right now the VIX is trading near 13.5, and for good reason. ?Despite last weeks moves, realized volatility is in the toilet. ?With the market moving no where, traders are selling SPX premium in the near term. ?Does this mean the market isnt cognizant of the coming risk? ?No, not at all, the market is already pricing in a lot of risk after Feb expiration. ? Take a look at the VIX futures curve
Notice, that in the near term, the structure is relatively steep, and VX futures are ‘low.’ ?Looking at the March time frame though, the curve completely flattens up, and the March future trades at a 5 point premium to the current VIX level. ?The market is actually predicitng a reasonable uptick in both market volatilty and fear, ?just not now. ?That elevated flat curve shows that the ‘bid’ in VIX futures is in March
Basically, if you think earnings season is going to be interesting, the VIX curve thinks you are wrong. ?if you think the looming debt ceiling debate is going to be a non-issue, the VIX curve also thinks you are wrong.
The Trade
The Feb future is likely about to face a blood bath. ?We like owning puts in the Feb contract, or possibly selling VIX call spreads.