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Odds Are Against Buying VIX Futures


July VIX futures trade in the mid 22s. But it's a snapshot, making it near impossible to pinpoint the next blip.

I will admit that I sound like a broken record on the subject, but I just will not understand the pricing of further out VIX futures and options.

VIX Julys expire in almost exactly three months. They carry a six-point premium to VIX "cash". Six points!

Now we all know volatility "mean reverts." We just don't know where that "mean" we "revert" to lies. But what particular reason is there to suspect that mean merits six points of premium out in July?

Let's see, 10-day realized volatility in S&P 500 (SPY) "surged" up to 12.5 from 7.5 this week, but it's a bit of a mirage. It's not at all a consistent uptick, it's the statistical effect of one outlier day in the mix, last Friday's volatile Goldman (GS)-suit-induced session. Let's say 7.5 is a bit artificially low though, and it hovers more like 10. The VIX is entitled to about a four-point premium over that, so "fair" is roughly 14. I'm not going to say it's high at 16, but it's not dirt cheap either. So let's call 16 fair.

July VIX futures trade in the mid 22s. It's just a snapshot, and as we know, the VIX can blip higher at any time. But the fact that it's a snapshot also makes it near impossible to pinpoint exactly when that periodic blip happens. So if you're buying VIX futures there, you pretty much have to either get very lucky, or you anticipate a more permanent rise in volatility. And that's what I just don't see. We've waited for this proverbial "other shoe" to drop for 10 months now. Anything can happen, but it's a low odds bet in my opinion.

Not to mention there are way better ways to play it. Why not just buy July puts in SPY? ATMs trade at a 16ish volatility.
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