Interesting signals from the VIX market. Here is last week’s snapshot:
Compare that to today’s snapshot:
The SPX index has moved from a close of 1451 last Wednesday, to the current level of 1433 as I type. But the VIX futures at every expiry are lower than they were at this point last week. That’s very bizarre action in VIX futures, particularly for the farther out months.
For the first couple maturities (Oct and Nov in this case), it is understandable that traders are not willing to buy premium in the SPX index when the index continues to move less than 1%, on both up and down days. In fact, today is the fourth straight down day for the index, but the total move is only about 2%, which normally could be a one day down move in a more volatile market. As a result, options buyers are unwilling to pay much premium for owning index options.
However, what’s more surprising is the fact that the farther out VIX futures (Feb13 to Jun13), all of them lower in the past week by about 3/4 of a point. Usually, a lower SPX index alone would be enough to cause the back months to rally, as the current realized volatility of the market has very little impact on 6 month expectations of volatility.
Options traders are buying into the idea that the QE3 put will offer protection against volatility over at least the next 6 months, signaling that they think the market can go lower without volatility picking up. Even May’s selloff this year was not accompanied by big volatility, so VIX futures are unlikely to rally until that changes.