Now we’re starting to see total volatility obliteration in the VIX
(^VIX) futures curve. Even though the VIX is already at five-year lows, we’ve seen one of the largest moves lower for three- to six-month VIX futures over the past three years.
Here is last week’s snapshot:
01/16/2013 Snapshot, Courtesy of Bloomberg
Click to enlarge
Compare that to today’s snapshot:
01/23/2013 snapshot, Courtesy of Bloomberg
Click to enlarge
While spot VIX is down 1 point, and Feb VIX is down more than 1.5 points, the real massacre has been in the farther out futures:
March VIX down almost 2 points
April VIX down almost 2 points
May VIX down almost 2 points
June VIX down almost 2 points
July VIX down almost 2 points
Aug VIX down almost 2 points
Sept VIX down almost 2 points
You get the point. But 2 points across all VIX futures! That’s an enormous repricing lower of volatility expectations for the balance of 2013 in just one week, and a clear indication that options traders are leaning towards a bull market environment a la 2005 or 2006 rather than a volatile year defined by fits and starts, which is what we’ve become accustomed to in the recent past.
It’s quite rare that you see such large moves across all VIX terms. However, since long volatility did not work at all last year, traders have decided that they’d rather wait for concerns to build before buying protection this year. Last year, they were overinsured. The question now is whether they’re underinsured.
This item by Enis Taner was originally published on RiskReversal.com
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