Fear? One of Traders’ Worst Fears Realized as VIX Curve Inverts

This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.

One must vanquish fear! Or at least the fear index, VIX. 

(Bloomberg) — The scariest Halloween costume imaginable pales in comparison to a Friday inversion of the VIX futures curve.

A severe sell-off in technology stocks has pushed the front-month VIX futures contract to a premium relative to the second-month contract.

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VIX futures are based off the Cboe Volatility Index, a measure of 30-day implied volatility for the S&P 500 Index that’s often called the “fear gauge.”

Typically, the curve is in contango — that is, upward sloping — because the outlook for U.S. equities is more uncertain over longer time periods than shorter ones. The historical pattern of realized volatility shows it’s prone to outsized spikes but generally trades in a modest range.

A curve that’s in backwardation — the opposite of contango — indicates traders are acutely concerned with the near-term outlook for equities. This structure also provides a tailwind to investors looking to go long volatility through exchange-traded products.
The same situation happened on a pair of inauspicious Fridays. The VIX futures curve inverted on Aug. 21, 2015 and Feb. 2, 2018.

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Yes, tech stocks took a beating last week (as can be seen in the FANG+ chart).

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Yes, the VIX is up slightly today after a large surge on Friday.

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Yes, one must vanquish fear!

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Wall Street Examiner Disclosure:Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. I am a contractor for Money Map Press, publisher of Money Morning, Sure Money, and other information products. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. In some cases I receive promotional consideration on a contingent basis, when paid subscriptions result. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. No endorsement of third party content is either expressed or implied by posting the content. Do your own due diligence when considering the offerings of information providers.

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