Heading into Thanksgiving, VIX futures have actually held up quite well. That’s especially true considering that SPX 10 day realized volatility has been below 5 for the past 2 weeks, and the S&P 500 index has continued to make slight new all-time highs in the month of November.
The chart of the front-month VIX future over the past year illustrates how implied volatility has held up even as the SPX index has had two big rallies to new highs (the first that topped out in mid-Sept and the second that is ongoing) since the early July lows in VIX futures:
The front-month VIX future is more relevant than VIX spot in my view, given that it is a tradable instrument rather than a tracking index. With that in mind, options traders have become less and less aggressive in selling index volatility even as the SPX index has made subsequent new highs.
I discussed a possible VIX trade in a NTT post on Nov. 7th, but noted that the futures curve was still quite steep:
Our first thought was that VIX spot should rise quickly after the new year as traders become more active at the turn of the calendar. However, the issue with trying to put on a Jan15 VIX options structure right now is that the Jan15 VIX future is still priced at 16.40. Here is the full VIX futures term structure:
As a result, Jan15 VIX options are priced off of that Jan15 VIX future level of 16.40, making it difficult to find a good risk/reward trade in the options at this juncture.
Fast forward to today, and the entire futures curve has moved a bit lower (July is actually flat):
The Jan15 VIX future is now around 15.85, down from 16.40 on Nov. 7th. Even with the upcoming holiday season, I would be surprised to see the Jan15 VIX future decline much more from here. The Jan15 VIX future is an anticipation of where implied volatility in the S&P 500 index is going to be on January 21st. In other words, traders already expect the holidays to be lower in volatility terms than January, when implied volatility is very likely to move higher as market volatility moves higher too.