VIX Not Flirting With Backwardation Anymore

I spent the afternoon watching the Harlem Globetrotters trounce Global Select 139 – 124 (I guess the Washington Generals gave up) with my kids so I missed the late afternoon drop in the markets. However, I noted when I returned home the flirtation between VIX and backwardation seems to be over. We spent the majority of the day on Thursday in backwardation and I was all prepared to blog last night on VIX being at a premium to both January and February futures, but a late market rally on Thursday and drop in VIX ruined that plan. However, with the stock market fearing no fiscal cliff resolution or at least not a satisfactory one, stocks dropped and VIX popped. 

VIX closed the day up almost 17% on the day to 22.72 – solidly over the psychologically significant level of 20.00. January futures were up 17% as well closing at a slight discount to VIX at 22.35. What stands out is January versus February action today. February futures closed at 21.95 at a discount to January. At least on the near end of the curve we have definite short term backwardation. This is highlighted by the red circle on the left side of the chart below.

One other thing stands out a bit for me on this graph. Beyond the first couple of months we have a normal looking curve. To me that means the VIX market considers the fiscal cliff a near term phenomena that may not get resolved in a day or two, but will be resolved sooner rather than later. Markets are not always right and different people can interpret things differently, but that is one story being told by volatility going into a critical weekend.

Speaking of the weekend, I’ll be gathering more info and covering the VIX markets as always starting this evening and running into tomorrow. No sleep for politicians and no sleep for many traders either this weekend.

Dec 29 2012 VIX Curve.jpg