Buy the VIX Now?

Now you have to...

Complacency and calm, that is the way to describe the general sentiment in the markets right now and we are hearing more and more "volatility is dead" trades presented. However, never ever forget that volatility is mean reverting. The actual VIX level at its natural floor, combined with the most extreme VIX call skew we have ever seen and several extreme technical positioning indicators, leads us to put on cheap VIX call spreads. To be clear, this is not a call that stocks will crash - this is a call on VIX upside optionality.

The saying is that you should buy VIX when you can, not when you have to - but this time it is slightly different - you have to buy it because the trade is simply too attractive to ignore.

1 - Natural floor

VIX is close to the "modern days" natural floor. Volatility is mean reverting, so don't expect much lower levels of volatility.

Source: Refinitiv

 

2 - VVIX not buying it

The latest gap between VVIX and VIX is very wide. You pay attention to well bid VIX, despite things moving little at the moment.

Source: Refinitiv

 

3 - A record skew

VIX call skew hit all time high of 1.5x (the 3 month 5/50 delta call). Volatility is low, but tails are priced extremely rich. This makes VIX call spreads attractive.

Source: GS/Garrett

 

4 - The puke

VIX specs have puked "it" since the election. They are back to running rather big shorts. Such big changes in specs could become a problem should things start to move again...

Source: Refinitiv

 

5 - The chasers

ETNs are huge buyers of VIX should things get a little less calm. We have seen this movie play out before.

Source: Nomura

 

6 - The Christmas gift

Long VIX under the Christmas tree? We have a few more boring weeks, but VIX seasonality is very strong from mid January. Can you afford to wait?

Source: Equity Clock

 

7 - Hedge fund leverage getting extreme

Many of the positioning indicators we look at are now at extreme levels. We are only showing one here - JPM prime brokerage data showing how net leverage continues to spike. with percentile numbers in the high 90's. This does of course matter for the VIX trade as well - a little less complacency leads to equity selling which leads to higher VIX. It's all inter-connected.

Source: JPM PI