VIX Calls, Greece, and the George Costanza School of Negotiation

The VIX plunged on news of a Greek debt deal, but calls remain popular

Jul 14, 2015 at 8:01 AM
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It's now officially official: the bear market has ended! Greece has taken a page from the George Costanza School of Negotiation and apparently agreed to a deal worse than what was made available a few weeks ago. 

Or at least that's what they tell me on TV. I really only follow this story because it's The Only Story That Matters for the moment.

They also tell me it's not actually done yet, just an agreement to agree to negotiate again in a few weeks. And that's great, because I'm not sure how financial TVers would fill their day without asking everybody to become an expert on Greece. 

But whatever. The Volatility Complex buys that this story will mercifully fade away. The CBOE Volatility Index (VIX) is now back to levels last seen before the June 29 Euro Blast. 

As we noted last week, the VIX futures didnt pop to the extent they did in other times of elevated VIX in 2015. So it probably pays to check it out again now that we're in at least a momentary decline phase. Well, here's ye olde term structure as of yesterday morning:


And we're back to normal! The slope has steepened, up over 3 points front-month to back-month, from 1 point just last week. And of course VIX is going to the high teens in half a year because … VIX is always going to the high teens in half a year, no matter where it sits now.

Oh, and about those comps. I picked a couple of other dates from 2015 where VIX sat in the mid-14s at least part of the day AND was in a bit of a decline phase, and compared it to yesterday.


And lo and behold, the term structure has dipped. In fact, it's dipped by a fair amount; it's between 1 and 2 points lower, depending on how far out we look. 

It's similar to what we saw in Elevated VIX. The marketplace simply doesn't price in the same future VIX pop as it did earlier in the year.

Complacency? I suppose it's complacency on a relative basis. But let's put it into some context. VIX futures still overprice the probability of a VIX pop at all time frames. It just overprices that probability less now than at other times. 

And VIX calls remain as popular as ever. In fact, even more so.

I've often wondered why poor results from buying VIX futures at big premiums and cheap VIX calls that never pan out hasn't ever seemed to change market behavior. So perhaps after six years of VIX Groundhog Days, the market is adjusting a smidge? Maybe.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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