Wednesday, August 15, 2012

VIX futures curve steepens again

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.
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