So, prudence prevailed as it normally does and with the vague unsupported comments of one Central Banker the fever is broken and the market is jubilant. Sure, the rally was extremely narrow with many large names not participating, but it was a rally and panacea either way.
Taking a look at the VIX term structure at the close:
Spot VIX: 17.53
Aug Futures: 19.14
Sep Futures: 20.90
We see that the term structure is less steep than just a few days ago with just 9% separating spot and front month futures and 9% between front and next month contracts. With 3 weeks left until futures expiration we are back in the No Man's Land that is 17.50 in spot VIX.
The implied daily roll cost is around 0.46% so, as always, we can't just sit on our laurels while we wait for a new direction. Sadly we can't just say that everything is fine and go short VIX with impunity at these levels either.
Tomorrow we have 2nd Quarter GDP. Next week we have both the FOMC and ECB meetings. A couple weeks after that we have Jackson Hole. Six weeks from now the German Supreme Court decides the fate of the ESM.
Any one of these calendar events could cause a spike back to the top of the range in volatility. The comments of Draghi today, while admittedly not entirely trustworthy, do make me side with a call for holding off on establishing new volatility positions at these levels.
If you were nimble enough to flip long XIV or short VXX, UVXY or TVIX I would remain in the position for the next few days as GDP disappointment will be overshadowed by FOMC expectations and the daily roll will buffer any small movements. Up until Tuesday I would expect volatility to be range bound to down and Contango will just hurt anyone trying to hold until Wednesday's announcement.
There will be some moves to be made before the FOMC decision on Wednesday, but that is a long time from now and I don't want to go out too far on a limb when forecasting volatility. Headlines are coming fast and loose lately so I like to keep my horizon pretty tight.
I understand the macro picture and also believe that fundamentally there are a large number of issues that the market is ignoring. That being the case, it can continue far longer than my sanity will allow me to get aggravated about. As always, I wish the volatility players good luck and good trading.