Now we’re starting to see total vol obliteration in the VIX futures curve. Even though the VIX is already at 5 year lows, we’ve seen one of the largest moves lower for 3-6 month VIX futures over the past 3 years.
Here is last week’s snapshot:
01/16/2013 Snapshot, Courtesy of Bloomberg
Compare that to today’s snapshot:
While spot VIX is down 1 point, and Feb VIX down more than 1.5 points, the real massacre has been in the farther out futures.
March VIX down almost 2
April VIX down almost 2
May VIX down almost 2
June VIX down almost 2
July VIX down almost 2
Aug VIX down almost 2
Sept VIX down almost 2
You get the point. But 2 points across all VIX futures! That’s an enormous repricing lower of vol 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 that 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.