Early in the year we discussed the steepness of the VIX futures curve as the spread between the 7th VIX futures contract and VIX hit a record. This steepening is taking place again. Investors are shorting 1-2 month equity options in hopes these options will expire worthless. The thinking is that Draghi's latest action should hold the markets stable in the short-term while the US government is unlikely to do anything meaningful on the budget until after the elections. Corporate earnings won't be known for a couple of months. Even the German court decision on ESM is not expected until mid September.
This selling of short-term options brought VIX down to a multi-year low.
|VIX futures curve: Blue = Now, Green = 1 month ago (source: Bloomberg)|
The longer dated vol however has not moved much. The steepness of the curve is approaching the highs reached earlier this year.
|7th VIX futures contract minus VIX|
This is telling us that in spite of the drop in VIX, there is no confidence that the recent market stability is sustainable over the longer term.