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:


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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