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Is VIX Pricing In The Fiscal Cliff?
Much is being made of the drop in VIX today - with some suggesting it indicates confidence that investors believe the fiscal cliff resolution is closer. This could not be further from the truth. Investors had bought short-term VIX across the election and are unwinding that protection in the November futures contract but at the same, they are actively bidding for protection across the event-horizon of the fiscal cliff - out to Fedb 2013.
The options market is absolutely not pricing in a fiscal cliff resolution and in fact is just beginning to price in the expected rise in realized volatility as the market becomes increasingly headline-sensitive once again.
The shift across the fiscal cliff barrier explains why short-term VIX looks more complacent as the medium-term VIX is bid...
As realized vol is on the rise so there remains plenty of room for implied vol to run higher...
This could not be further from the truth. Investors had bought short-term VIX across the election and are unwinding that protection in the November futures contract but at the same, they are actively bidding for protection across the event-horizon of the fiscal cliff - out to Fedb 2013.
