VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30 day period. The VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, which is then annualized. The VIX Index was developed by Prof. Robert E. Whaley in 1993 and is a registered trademark of the CBOE.
As VIX drops below 15 for the first time in almost a year, the clarion calls of ‘all-clear’ should perhaps be tempered with the record-steepness of the volatility term-structure. Simply put, everyone and his mom is now selling short-dated vol but mid-term vol remains stubbornly high – in English, we’re safe today but tomorrow could be a disaster – or given medium-term risk outlooks, short-term traders are the most complacent they have ever been.
The writing of covered calls – or overwriting to juice returns – seems to be reaching crescendo levels given this steepness. Writing premium is a no-brainer trade until it reaches down your throat and rips your guts out…
Each time the VIX/VXV term structure has reached down to these levels it has snapped back extremely quickly – this is a record steepness for the short-term vol term structure and should be viewed with massive skepticism.
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