So my call from Monday was a bit early and we had some more upside in long volatility products Tuesday. After hours we had another spike that some may have been able to take advantage of, but we were already back down below the close in pre-market trading.
The term structure is actually pretty flat at this point:
- Spot VIX -- 20.47
- August Futures -- 21.85
- September Futures -- 23.20
With only 6.3% separating spot and front month, VIX entering backwardation is definitely a possibility. Anyone holding long volatility should salivate at the idea of VIX entering backwardation as the returns start to compound quickly in that scenario.
Also, the roll cost of ~6% is also attractive for those willing to risk a run higher in volatility. At a 6% roll, we should be seeing only ~0.3% daily downward pressure due to the contango. Usually, this runs closer to 0.5% or more and as such will make it easier to hold a VXX, UVXY, or TVIX position for a longer period of time.
A Look Into the Future
Today, or in the next few days, anyone holding long volatility positions needs to make a decision. The market has now dealt with an Apple (AAPL) miss and Spain/Italy heading down the rabbit hole. After an AH collapse, we are already trading in green territory. True, much of the green is due to rumors of Fed and ECB intervention, but we are less than a week away from the FOMC meeting and less than a month away from Jackson Hole.
VIX could continue spiking, especially since it closed above the 50-day simple moving average, but there are multiple opportunities in the coming weeks that could lead to coordinated intervention from the powers that be. Even if the plans are all smoke and mirrors, there is a good chance it will break the fever that is developing according to the VIX. The fever may worsen as we near these events, or the big players may actually attempt to front run the announcements, which will limit the upswing in volatility.
As always, I recommend prudence for those long volatility products. There are simply too many opportunities for them to announce a fix and the situation is such that they will have to announce something soon to prevent Spain and Italy from collapsing completely. Germany may talk a big game, but "Spitaly" will force its hand very soon.
Everything is not butterflies and unicorns in the world, but the markets are rarely an accurate reflection of reality. We are close to VIX backwardation, which would favor holding long volatility even at these levels, but at any moment headlines from Europe could break the fever that's developing and cause a sharp downturn in volatility. Lock in some more profits and keep a few irons in the fire if you still have them, but be ready to cut and run on the first positive word from the global "bankster" brigade.