It is news when the VIX cash settles at a level that is higher than the VIX futures. I think it is an even bigger deal when the VIX settles above 6 futures contracts like it did today (almost 7, actually). Yet, there was something that was also interesting about today, the movement in the VIX futures themselves. While the futures certainly reacted to the news, the entire curve really didn't flatten up very much.
In fact, I cannot remember the last time I saw VIX cash trading higher than 6 months of futures while the curve was this flat/in contango. I am not sure what to make of it. Here is what I do know:
1. Today was a total 'vol race', as traders were trying to buy every piece of premium they could get.
2. This had NOTHING to do with Sequestration, or the Fed and everything to do with the Italian Elections
3. Traders wanted GAMMA not vega. While we did see some movement in the back months, the movement was at 1 month and closer. Take a look at how much the weeklies moved today. Beyond April IV, movement tailed off and stayed at historically reasonable levels.
4. Weekly option IV's are predicting the SPX to move above its long term mean vol of 18-20% for at least the next week.
Livevol (r) www.livevol.com
5. NDX really underperformed.
6. Those playing the VIX carry game got burned today.
When the VIX is low and then we have a piece of news hit, it can cause what we saw today. There are those that will say this was complacencey. I would say that this was more of a market changing event happening. The market priced in the status quo (as did everyone else) in Italy. When the news came out that the assumption was incorrect, the VIX, almost dynamically, updated itself to what seems to be a more appropriate vol.
Skew is steep and weeklies are now really well priced. It is SO tempting to sell into this, but WAIT. It almost never pays to sell vol into a rally. If Italy really is a mess, then we could see some more market vol for a while. ON a day like today, rather than sell vol in size, dip the toe in small, or better yet, do nothing. Wait for a down tick before selling VIX, VXX or VIX futures here.
There are other interesting trades out there as well (Japanese Yen, Corn sell off, WTI), be patient with VIX.
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