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What the steepening VIX futures curve means

By Sober Look

Early in the year we discussed the steepness of the VIX futures curve as the spread between the 7th VIX futures contract and VIX hit a record. This steepening is taking place again. Investors are shorting 1-2 month equity options in hopes these options will expire worthless. The thinking is that Draghi’s latest action should hold the markets stable in the short-term while the US government is unlikely to do anything meaningful on the budget until after the elections. Corporate earnings won’t be known for a couple of months. Even the German court decision on ESM is not expected until mid September.

This selling of short-term options brought VIX down to a multi-year low.

The longer dated vol however has not moved much. The steepness of the curve is approaching the highs reached earlier this year.

This is telling us that in spite of the drop in VIX, there is no confidence that the recent market stability is sustainable over the longer term.

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Sober Look is a no-hype financial markets/macro blog that typically relies on data analysis, primary sources, and original materials. We keep it concise, to the point, with no self-promoting nonsense, and no long-winded opinions. If you are looking for Armageddon predictions or conspiracy theories, you will be thoroughly disappointed. Topics include financial markets, banking, asset management, risk management, derivatives, global economy, policy, and regulation, with the emphasis on finance education. Follow him on his blog or twitter.