SPX IV Nearing Low Point, VIX Futures Flattening
SPX vol touched its lowest point since before the S&P downgrade. While it was unable to hold, if tomorrow's ADP number is somewhat inline or better I think it drops below 25% in the morning:
VIX term structure is really starting to flatten up. VIX cash is in line with September futures, and while there is still some backwardation between September and October, the entire curve is flat behind October (this makes being short VXZ a potentially good idea, it also points toward XVIX starting to underperform as well).
However, once we shake out employment and the market takes out the weekend I would expect cash to be in the 27-28% range and VIX September futures to drop below 30 and possibly 29 depending on where the Cash goes. Heck, VIX could potentially hit 25% if things are really rosy.
So how does one trade this? I think an iron condor with as flat a delta as possible makes a ton of sense. With the markets run up, I am no longer afraid of getting short some upside. For those that think a turnaround is imminent, I think IV is cheap enough that a 1 by 2 back ration in NDX or RUT might make some sense too. NDX outperformed SPX on this bounce back (mostly behind the power of AAPL). I also think owning VIX puts might make some sense too. If one wants to play the ETN's the structure is pointing toward getting short VXZ to take advantage of volatility declining, at least until VIX front month enters contango.