The following article first appeared in the March 6, 2012 issue of e View a bi-weekly publication of RJO Futures:
Volatility Index Futures
By: Michael McCarty, Differential Research, LLC
03/06/2012 11:30am CST
While the CBOE Volatility Index® (VIX®), having fallen from its 2011 high of 48, has seemed for several weeks to be attempting to establish a base at the 17 level, with 20-day realized volatility for the S&P 500 (SPX) Index remaining in single digits, shorter term VIX futures have remained under pressure.
With longer dated futures remaining firm, the VIX futures forward curve has remained historically steep.
While a lack of volatility in the equity market is likely to continue to put pressure on VIX futures, the current level of implied volatility coupled with the likelihood that the equity market could either correct its recent gains and/or see a meaningful increase in realized volatility, remaining short volatility futures is no longer an attractive trade from a risk/reward perspective.
At this time, hedgers of equity portfolios should maintain their targeted exposure to volatility. Speculators should consider buying the front month VIX future; spread traders should enter flattening trades–buying the front month VIX future while simultaneously selling the third or fourth serial VIX future.
Sources: CFE, Yahoo Finance, Differential Research, LLC
The risk of loss in trading commodity futures and options is substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.
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