The VIX price action in the past 2 days has been noteworthy. The SPX has made new all-time highs in a grinding fashion on each trading day so far this week, but the VIX is actually higher on the week. It’s not simply a phenomenon of VIX spot either – May VIX futures, which would normally get hit the hardest, are only down from 14.25 to 14.10 this week, a very small move in light of the low volatility, low volume grind we have experienced.
My hunch is that traders are increasingly replacing their outright long stock positions with long call options instead, to allow them to participate in the rally, but with limited risk in case it turns on a dime given its extended nature. That has created a bid for options and has kept the VIX elevated.
Here is last week’s snapshot:
Compare that to today’s snapshot:
All months are down between 0.25 and 0.75 point compared to last week, but it is in a parallel fashion for the most part, rather than a steepening of the curve. That’s a sign that we are seeing more sellers of the back end of the VIX curve than we did during calm periods earlier in the year. One sign that VIX traders are gaining more conviction in the sustainability of low volatility going forward. Others would argue that it’s a sign of increased complacency. Regardless, VIX action this week suggests that traders don’t see much downside for short-term volatility pricing.