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What Happened to VIX Futures?


It's surprising how poorly they did, given the circumstance.

If there's one thing we've learned since the inception of VIX futures, it's that they lag moves in the VIX. Which of course makes sense: The shorter a volatility measure, the more subject it is to noise. Conversely, the longer the measure, the more it just prices to mean reversion. "Means" of course move, just relatively slowly.

So it makes perfect sense that VIX futures didn't fully follow the pop in the VIX a couple weeks ago and, in fact, traded at a decent discount for the first time in months.

What's more interesting is how poorly VIX futures did in the subsequent large decline in the VIX. December futures have a 1.50 premium or so to the VIX, which over the course of time, is pretty normal for a future of that duration. But on the heels of a week where the VIX just got drubbed, it's surprising how quickly the futures followed suit.

What's it say?

Well, I don't want to sound like I think $1.50 is too cheap. In fact, it seems pretty fair. What it tells me, though, is that perpetual assumption of a return to higher volatility somewhere around the corner continues to ebb. Memories of 2008 are fading. The blip up to 31 is considered just that -- a blip. Before 2008, sudden spikes like that were considered both bullish for the market, and likely to ebb very quickly. That kind of sentiment has apparently returned. And it makes sense; 2008 was the outlier. We'll of course see periodic bursts of fear like that again, but they'll mostly be contra tells.
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