When traders see a wide spread between the VIX and Front month futures they often get confused or even worried. When in fact the opposite is usually true. Last month with 8 days to go to VIX expiration the VIX closed at 13.19, the April VIX future closed 13.60. A mere .50 premium to the cash. The VIX future ended up settling at 15.64. The month before that the VIX closed 11.56 (it’s lowest since 2006) the March VIX futures closed 12.95 on their way to a settle near 12.50. Today the curve looks as such:
While there is posturing that normally goes on in Washington, then I guess there is another level of POSTURING when things get serious. I am now beginning to think that Beltway politicians are the most overplayed relative to their work output. I have not seen a lot of work output and they are all leaving for vacation. I hear Nero’s fiddle playing in the background.
For the second day in a row, we have seen the SPX break a significant 'technical' barrier. Yesterday the SPX failed to hold 1400; today the SPX on another decent sell off broke the 200 day moving average. To some this would be considered a MAJOR bearish sign. Yet I think it could be different. Below you can see a chart of the SPX and its ugly day.
When viewing the market, many people look at today as a sigh of relief. That the world will not end and all is well. Personally, I don't see it. While there is talk out of Europe that a deal might get done, I do not think the markets are quite as comfortable with the movement as one might think. For starters, as I write this, IV in SPX options was down more yesterday than it was today.
I have been a constant bear of just about any volatility product that has existed over the last 6 months, essentially, since the VIX broke through 30 back in November. And I actually continue to be a bear. With the market not moving, VIX is a little overpriced, believe it or not. But that does not mean that I don’t think there aren’t times where call options or VIX straddles might make some sense. In order to buy VIX options, the following needs to exist collectively:
1. VIX cash needs to be in relative terms low
2. VIX futures need to have a low contango relative to VIX cash
3. VIX options need to have a low IV (VVIX needs to be low)
We will be having the second free webinar in our using the VIX to trade series. Go to our EVENTS page to register. Also, make sure to read the Option Pit Challenge below:
As I was looking at the VIX trading relative to the SPX, I was struck by a few things:
1. While the VIX really threatened to break 20, it never did. The VIX rallied toward the end of the day, which shows there are some buyers of insurance that are willing to step in and buy insurance with the VIX at 20.00