Ramie 8:07 am on Wednesday, February 15, 2017

Interesting divergence

Between the market and the VIX.

fuzzballl 8:10 am on Wednesday, February 15, 2017

From VIXcontango.com:

Yesterday was a legendary day for the short volatility trade. The March contract settled at 12.30 after starting at 13.075. I didn’t think it would get much below 12.90. I gasped in amazement as it hit 12.60 and finally settled at the unreal level of 12.30. This contract has 25 trading remaining. A mere jump of the VIX to 12.50 at any point over the next 5 weeks would render a 12.30 entry a losing trade. A jump to 12.50 is not anything out of the ordinary. The VIX reached a high of 12.47 just 9 trading days ago on February 2nd.

Earnings Growth Begets Low Volatility

So we ended up with a -5.93% day for the March contract which today becomes the front month contract. What is strange about this drop was that the VIX didn’t move that much – it only fell about -3% to 10.74 while the VX1 struggled to keep pace at -2.19%. But the March contract (VX2) certainly made up for it. I think this was a forced selloff. There were a lot of people banking on a rise in volatility in the first quarter (Savita Subramanian of Bank of America the latest of these people to make such a proclamation on CNBC yesterday) and when VIX expiration comes around and the VIX is scraping the bottom, people are forced to reshuffle positions in the VIX futures markets. And that usually results in fire sales like the one we witnessed yesterday. Such a selloff off of such low volatility levels to begin with is simply legendary. That is why this day will be forever known as “Savita’s Valentine’s Day Crush”!

To get back to more pressing matters, the 2017 March VX contract will start off at the lowest price in this bull market that started in 2009. Overall this is the 5th lowest start ever as there were quite a few months in the 2004-2007 bull market where volatility was really low