In an earlier note we spoke about a September call spread in which an investor appeared to be taking in premium (Sep 19/28 call spread @85-cents).
We noted that, of course, the strategy was far from risk free even though losses were capped, but still, onlookers note that complacency seems to be breeding further complacency. With stocks close to record highs, and the geopolitical tension surrounding Ukraine struggling to find a place in the lexicon of economic disruption for now, investors continue to drive down volatility.
So in light of that earlier September Vix options trade, we decided to look across the time horizon to measure how investors are currently pricing risk through year end. While the CBOE Vix index is lower by around 5% today at 12.33, the September Vix futures contract was trading at around 16.20 when the option combination was positioned. This tells us that investors appear to be willing to move out along the maturity horizon to bag what they presumably see as lofty volatility.
Falling, but still lofty?
Notice though, that deferred contracts have slipped by far less than closer expirations. For example, since April 25, the December contract has fallen to 17.2 or by less than 5%, while the May contract shed 16.3% at the same time. You can see the massive expansion of spreads as a result. What might prove interesting on any volatility spike is what happens to the shape of the curve. When futures contracts surged in early February on the last volatility spike, spreads compressed. Indeed the value of the May future was above the December future by 0.45 in comparison to its current 4.15 differential. The more interesting trade might be found in seeking value in spreads rather than trying to push volatility ever-lower.