Futures Trading: Will VIX Term Structure Remain Calm?

Posted On September 11, 2018 2:53 pm

analytics chart, stock chart

Source: Pixabay.com

Despite increasing drag of trade tariffs and swirling cross-currents of currency valuations curtailing global growth causing overseas markets in bear territory, the U.S. stock market keeps powering higher.  

And judging from the Volatility Index, or VIX traders expect the calm to continue even as we head into the notoriously turbulent month of October.

The term structure of the VIX futures — the difference in prices for various timeframes — has flattened considerably over the past few months.   Historically, under normal cantango, the spread is 5%-7% from one month to next.

As you can see, once you move beyond the 1st to 2nd-month spread, it is a minuscule 1%-2%.

FUTURES CHART, stock chart

Source VIXCentral.com

A few of reasons for this flattening are; after February’s debacle, one various VIX related exchange traded funds blew up. People are once again getting comfortable selling option premium.

Also, much of what drives the term structure is the skew, or difference in implied volatility across various strike prices.  And right now, nobody is paying a premium for far out-of-the-money puts.  Meaning, people don’t foresee a major market correction or the need for portfolio protection.

Whether this turns out to be misplaced complacency or a reliable prediction remains to be seen.   

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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