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.
