Crazy VIX future premiums as VIX drops

Yo, Pit Crazies,

The VIX futures curve is setting up in an interesting fashion.

It’s something I have not seen for at least a year, maybe two.

What is it you ask? What does it mean?  

It is the first real signal the market is ready for a sea change in volatility

Let’s see what it is …

Massive Contango in the Front-Month VIX

What this means is that there is a large drop in short-term volatility in SPX.

10-day realized volatility is very low, around 10%, and the May VIX future is 19.5%. That means premiums are very expensive relative to the underlying volatility.  

Simply put, the market is not moving too much. It has not been this low in realized volatility in over a year.

The market needs lower volatility to get to a lower VIX.

That may sound simplistic, but that is what has to happen. Things have to get boring for a while.  

Fed comments in early May and Tesla Inc (Ticker: TSLA) earnings were not great, so there is some potential for moves. Will we get them? The key is how much movement the news generates. TSLA missing is a big negative, but stocks are only down .75% this am.

At this point, the stock market has gotten used to higher rates and it just trades at a lower net price until things change. 

That also means VIX can bounce around in the low-to-high teen’s instead of the low-to-high 20s.  If there is nowhere higher for stocks to go, as in way higher without more QE or lower rates, 4,200 is a terminal top.

That happened for 20 years prior to 2020.

VIX May 17 16 puts still look cheap to me and provide good leverage opportunities.

I am betting we see a 14 VIX by June.

See how Mark plans to profit tonight.

To Your Trading Success,

AG