As VIX drops below 15 for the first time in almost a year, the clarion calls of 'all-clear' should perhaps be tempered with the record-steepness of the volatility term-structure. Simply put, everyone and his mom is now selling short-dated vol but mid-term vol remains stubbornly high - in English, we're safe today but tomorrow could be a disaster - or given medium-term risk outlooks, short-term traders are the most complacent they have ever been.
The writing of covered calls - or overwriting to juice returns - seems to be reaching crescendo levels given this steepness. Writing premium is a no-brainer trade until it reaches down your throat and rips your guts out...
Each time the VIX/VXV term structure has reached down to these levels it has snapped back extremely quickly - this is a record steepness for the short-term vol term structure and should be viewed with massive skepticism.
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With all the Vol ETFs, we just wonder how much impact these are having on this short-dated vol compression - especially as longer-term vol fits much more accurately with credit implied protection costs - meaning reality in the short-term remains, well, complacent is a polite word.
Using the vol term structure to 'bet' across event risk time horizons is a popular trade (perhaps on Greek sovereign litigation risk concerns) but we think the collapse in short-term vol is as much as matter of levered longs chasing risk (as S&P has lost its juice) as it is a thoughtful risk positioning for some inevitable risk flare.
Careful with those fingers in front of that steamroller...
Chart: Bloomberg