Contango

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.

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)

4.  No great alternative trades

Let’s start with 1 and 2,

As I looked through the stats of today's market selloff, I noticed a few interesting things.  The most significant was this: for how much the SPX was down, IV did not seem to rally very hard.