VIX spot and futures were slammed on yesterday’s rally. The market got more comfortable that the disastrous tail risk of a debt ceiling breach was off the table. In the anxiety earlier this week, VIX spot actually got close to its high of 2013:
As I mentioned in this morning’s Macro Wrap, yesterday was the largest one day up move in the market since Jan 2, 2013, the first trading day after the fiscal cliff agreement was reached. The VIX collapsed on that day too, all the way down to 14.5 from 22.72 just 2 trading days prior. This time around, the decline in VIX spot is not as severe (which is not surprising since we do not have a total resolution just yet). VIX spot is now near the mid-point of its 1 year range.
But VIX futures farther out have held up better this time compared to that January rally. The SPX index is trading very close to where it was 1 week ago, while Oct and Nov VIX Futures are lower as negotiations have progressed. The back end is down about half a point compared to last week.
Here is last week’s Snapshot:
Compare that to today’s snapshot:
The nature of the political resolution will likely have a major impact on the VIX futures curve. If it’s simply a 6 week extension of the debt ceiling, then traders are quickly going to start bidding up the Nov13 and Dec13 futures to capture the potential for negotiating problems once again.
Finally, I find it notable that SPX realized volatility has increased substantially in the past 10 days. 10 day realized volatility is now approaching the 1 year high:
In each case, realized volatility has quickly calmed down. If that repeats again, then VIX in the high teens is a sale. But if realized volatility persists, that would be a first in terms of volatility behavior over the past year.