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When it comes to CBOE Volatility Index (VIX) futures, context matters
So what if I've now joined the entire world in saying that volatility will trend higher? It's easy to predict something into the ether. It's especially easy if you do it on TV, as there's no repercussion for making a bad prediction … and then coming back on the air three months later and making the same prediction again. And again … and again ... it will eventually look prescient.
I could do it here in print too. Suppose the CBOE Volatility Index (VIX) is 13 in July? I can just say that the overall long-term trend is higher, not some sort of "day versus day" with random endpoints. But I am actually saying it will trend higher over time -- and day-over-day comps are kind of meaningless through that lens.
A better lens is the year-over-year means that I ran yesterday. I do say the 2015 mean will end higher than the 2014 mean. But that's honestly an easy prediction. We've already booked a month of elevated (versus 2014) means in 2015; if nothing else it's a positive expected value call. It's not actually a value-added prediction, so I'll clarify it to say that it's a call on the next 11 months going forward.
But it's more important to see how the masses vote with their feet. VIX futures are a decent way to gauge expectations for future volatility. On the surface, it looks pretty "eh." Here's the current VIX term structure:
It's a modest premium to VIX itself, and it's relatively flat. Nothing to see here, right? Well, I always like comparing the term structure to other sessions that had a similar VIX backdrop. And here we go -- it's yesterday's term structure versus those on Oct. 24 and Feb. 7 of last year.
And as you can see, the volatility guess-timates going forward are indeed more bullish (for VIX) now than they were at similar backdrops in 2014. On the surface, that's bearish for volatility on a contrarian basis. But in context, I'm not so sure. We've now had nearly a year of repeated volatility pops. So it makes some sense to internalize that this is a more permanent sea change taking place. We're also further along in the long-term low-volatility regime, which suggests VIX is creeping up anyway.
So yes, people are indeed voting with their feet, and they're quietly saying "higher volatility." But it's tough to make the case that's anything but a sensible call.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.