The VIX is 30 days out.
You’re watching it every morning and making decisions off it, and the whole time it’s telling you what the market expects a month from now. The VIX is fine, but it’s not in the here and now, and it’s not a great indicator like it used to be.
So what do I look at instead? Volatility futures, and I’ll tell you right now we’re going down the rabbit hole pretty far on this one, so stay with me.
Pull up the term structure and you’ve got contracts expiring at different points in time, say a 23-day sitting next to a 51-day. What matters is the difference between the two of them rather than either number on its own.
That difference runs about 70 to 85 cents in a normal range, and what it’s telling you is the intensity of volatility right now against a month and a half out.
Watch what happens when those two start to converge. When the gap closes up, volatility is coming up, because the market is repricing what’s about to happen and dragging the near-term number toward the far one.
And when things get really wild, you’ll see the 23-day go over the 51-day, which implies that the world is blowing up today and is actually going to settle back down 51 days from now. That’s when the crap really hits the fan.
None of that shows up on a VIX print, so somebody staring at a VIX quote has no idea any of it is going on underneath.
The other one I watch is VVIX, and this one I do have a level on.
It’s the volatility of the VIX itself, which sounds ridiculous until you understand what drives it. When professionals get uneasy they don’t dump stock, they reach out and buy calls in the VIX as crash protection against their S&P exposure, and that buying is what makes VVIX soar.
So watch for the mornings when it refuses to cooperate.
I saw one where the S&Ps were up 50 handles with real strength on the tape and VVIX was down all of 2%, when normally it drops far more precipitously than that on a move like that, and it just sat there.
Meanwhile the headlines had everybody up that morning because the market was pricing in peace. They were pricing in peace while a corner of Saudi Arabia was on fire from a couple of friendly, peaceful missiles hitting, so there was absolutely less peace than you would’ve anticipated.
Price whatever the hell you want. The volatility complex wasn’t buying it, and all the volatility indicators point to it’s uneasy out there.
That’s the read you’re after, and it isn’t the VIX quote, it’s what’s sitting underneath it.
You can spend all morning working out what the market is pricing. Do you know what you’re paying?
I run five checks before I put on any trade, and one of them catches the cost that bleeds out of your position every single day even when you’re dead right about the stock. The whole thing takes about sixty seconds. Normally $29.97, free today, no credit card.
To your success,
Don Kaufman
