"Something Strange Is Going On With VIX..."

At the end of last week, we noted that VIX and the S&P 500 were behaving in an unusual manner.

Specifically, for the second week in a row, S&P and VIX were higher together... the first time since Nov 2013.

https://www.zerohedge.com/sites/default/files/inline-images/20180119_eod5_1.png

And VIX was drastically decoupled from stocks since 2018 began...

 

https://www.zerohedge.com/sites/default/files/inline-images/20180123_vix1.jpg

 

 

But, even more 'odd' as noted by Eric Robertsen, head of global macro strategy and FX research at Standard Chartered, "something very strange is happening with the VIX term structure."

Typically, as Bloomberg reports, the VIX curve flattens during market selloffs as investors bid up front-end volatility.

In recent days, however, the curve has flattened as the market kept rallying.

Here's a look at the five-day moving average of the gap between 3rd-month and 1st-month VIX contract.

 

https://www.zerohedge.com/sites/default/files/inline-images/20180123_vix_0.jpg

It appears that the front-end of the vol index curve moved up as investors bought call options to chase equity gains.

That can be seen in the recent increase in the call/put ratio for the S&P. 

Notably, as Bloomberg reports,  as U.S. stocks trade at all-time highs, the price tag on bearish options has dropped to a trough relative to bullish contracts. The spread between the price of one-month, 25-delta puts and calls for the S&P 500 is roughly two standard deviations below its five-year mean, data compiled by Bloomberg show.

It’s an indication of the greed -- or lack of fear -- in the market suppressing the Cboe’s volatility gauge.

This is a record low skew - bullish/greed - lower than at the peak of the market in 2007...

https://www.zerohedge.com/sites/default/files/inline-images/20180116_skew.png

The persistent decline in put prices -- paying less for downside protection -- drove the downtrend in the measure known as skew during most of last year’s second half. Since Jan. 3, investors chasing upside have led to an increase in the cost of calls, contributing to the historically significant level of bullish positions, the data show.

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At a minimum, it suggests that it's less appealing to sell long-dated vol as carry is diminishing. It is also a sign that equity investors are getting too complacent.