Apologies for the late heads up - April VIX expiry at market open today (last trade date yesterday).
VIX 2m - 1m spread had once again widened over the course of the last 2 weeks or so, though not as wide as the Feb-Mar or Mar-Apr spreads were upon their respective expirations.
For those unfamiliar, over the past several months I have been tracking the front end of the VIX futures curve (spread difference between 2nd month - front month VIX), and found that repeatedly and remarkably consistently, as the VIX 2m-1m spread widens, SPX ↑. And when the spread contracts, SPX ↓. The spread is usually a positive number, which makes sense (more uncertainty 2 months out than 1 month, so 2m VIX should be > 1m VIX). Should the spread not only narrow, but go so far as to cross into negative territory, where the front month VIX > 2m VIX, thats when you see -2%, -3% more on 1 day SPX. Negative spread & SPX ↓makes sense, as it implies more (and sudden/ unexpected) uncertainty imminently than there is 2 months from now.
Prior expiry dates: VIX 2m-1m vs SPX. Note the sharp widening of the spread coinciding with SPX ↑, then spread collapse upon expiry for SPX pullback.
Past few weeks saw spot VIX finally break below 20, first time since March ‘20 havoc. Much of this was the record speculative call options open interest and premium fading out of the markets (ie- reason VIX had maintained >20 since last March was from an enormous surge in call option activity bidding implied volatility premiums ↑. This is the “fear index ” → “greed index”) Put selling has also re-entered the picture given the rosy market outlook upon fireworks worthy expectations of reopen consumer spending and hiring. Yes- apparently even the more than doubling of the risk free UST yield is seen as less attractive or even less safe than selling vol to collect premium (more confidence that VIX declines than UST yields do).
As spot VIX drifts mechanically lower down the high-teens, front month VIX ↓, but 2nd month May (and expirys thereafter) VIX remain >20. Resulting in an SPX rally through 4K. Also contributing - hedge fund “de-risking“ and short covering, pushing SPX ↑ & vol ↓.
But just as the last 2 months heading into VIX expiry with a widened out 2m-1m spread led to SPX pullback, so too would be the case now, as the low front month VIX contract expires and the new front month is both elevated AND narrower front end spread. Were already seeing that play out in markets last day or 2 as last in VIX futures roll out of April and into May (sell April to buy May → widening spread leading up to last trade date). Though this months April - May spread isnt as egregiously wide as Feb-Mar & Mar-Apr were, this time might have an extra kick as it can pull VIX potentially back up into the 20 handle in the immediate-near term.
April VIX vs May VIX: +2.65 vol spread ↓
Current price action
Moral of the story - same as always: US equity markets are more mechanically driven than they are headline sentiment driven. So don’t buy into whatever today-rest of the week’s “virus/vaccine“ headlines are as the driver. Nobody is putting on / taking off risk based on J&J good/bad today, or India matters/doesn’t tomorrow, or earnings coming- get long/short single stock FANG, or any other arbitrary “but if you don’t factor in the timing then it makes sense“ nonsense.
Also just wanted to get this out before ECB in case Christine Lagarde gets all the credit/blame for something structurally scheduled on the VIX calendar.