What Are VIX Futures Telling Us Now?

Yesterday, we wrote how investors’ fixation with round numbers included the CBOE Volatility Index’ (VIX) recent, a brief flirtation with the 20-level. Granted, it only managed to crack that number for the final 3 minutes of the trading day last Friday, but its timing seemed auspicious – at least when the US left for a 3-day weekend. By yesterday, we saw the index bounce back to around 21.5 on a day when major indices mostly meandered, seemingly rendering moot the low volatility theme for the time being. Yet while most of the media attention focused on the level of the spot VIX index, out of the limelight, futures were telling us a very different story about the potential return of volatility in upcoming months. 

Consider the graph below:

VIX Futures Curves: Current (green), 1 Month Ago (orange), 5 Months Ago (blue)

(Click on image to enlarge)

Source: Bloomberg

We see that the futures curve has steepened dramatically, resembling the shape that it maintained in the weeks leading up to the 2020 election. At the time we noted, along with others, that the election and its aftermath had the potential to be a volatility-inducing event. That proved to be the case. The post-election rally eventually pushed 7-day historical volatility for the S&P 500 (SPX) over 35 before subsiding over the ensuing weeks. We can argue that VIX futures traders more or less got it right.

So we have to ask ourselves what those traders see over the coming months that leads them to anticipate a similarly large bump in volatility over the coming months. When we compare the orange line to the green line in the graph above, we see that that the curve’s steepness rose sharply since last month. Something about the market’s expectations for future volatility has changed over the past few weeks. There is no obvious catalyst like an election to boost expectations, though. We can see that the market is concerned about something, though it is hard to see what that might be.

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Disclosure: FUTURES TRADING

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC ...

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