Fear? One of Traders’ Worst Fears Realized as VIX Curve Inverts

One must vanquish fear! Or at least the fear index, VIX. 

(Bloomberg) — The scariest Halloween costume imaginable pales in comparison to a Friday inversion of the VIX futures curve.

A severe sell-off in technology stocks has pushed the front-month VIX futures contract to a premium relative to the second-month contract.

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VIX futures are based off the Cboe Volatility Index, a measure of 30-day implied volatility for the S&P 500 Index that’s often called the “fear gauge.”

Typically, the curve is in contango — that is, upward sloping — because the outlook for U.S. equities is more uncertain over longer time periods than shorter ones. The historical pattern of realized volatility shows it’s prone to outsized spikes but generally trades in a modest range.

A curve that’s in backwardation — the opposite of contango — indicates traders are acutely concerned with the near-term outlook for equities. This structure also provides a tailwind to investors looking to go long volatility through exchange-traded products.
The same situation happened on a pair of inauspicious Fridays. The VIX futures curve inverted on Aug. 21, 2015 and Feb. 2, 2018.

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Yes, tech stocks took a beating last week (as can be seen in the FANG+ chart).

defanged

Yes, the VIX is up slightly today after a large surge on Friday.

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Yes, one must vanquish fear!

fear

One thought on “Fear? One of Traders’ Worst Fears Realized as VIX Curve Inverts

  1. VIX in contango because for 9+ years speculators have been conditioned to sell volatility on even the slightest uptick. VIX at 18 is now considered a “spike”. Katie bar the door if we ever get another 2008-09 episode where it blows out to 80.

    Like

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