Who Wants to Buy The Juice?

The market drifts lower today and nobody seemed to care.  It is only May 14th and Summer is still a month away officially so this is a bizarre kind of complacency, or is it?  The volatility futures did have a little pullback priced in with the VIX trading near 12%.  The premium in the front month was a $1.05 on the close and a shade more yesterday.

The reality is a 9 point drop in the SPX is only .5%.  That is roughly an 8 VIX.  The May futures are pricing 13.23 and the Jun 14.73, so even a decent selloff is priced in.

Data by www.livevolpro.com

That would mean we need consecutive days of selling with some accelerating movement and with the 10 day realized volatility around 7.67, the market needs a big reason.  Right now it does not have one unless the contagion in the RUT starts to spread, but for now that is not happening.  I would not be surprised if the VIX stays this low that we rally.  The future heavy VXX is a nice vehicle for what I have in mind.

The Trade

With the VIX this cheap and the futures expensive, downside puts in the VXX of short duration makes some sense.  You could make it a funky strangle for protection by adding cheap upside flies in the VXX of same duration.  Keep the fly cheap.