Big VIX Spreads, the Fed, and the Flattening Yield Curve

Tomorrow afternoon (1 P.M. Chicago time) the market will digest the minutes from the April FOMC meeting. In advance of that release (which happens after every FOMC meeting) two (non-voting) Federal Reserve Board Presidents, John Williams (San Francisco) and Dennis Lockhart (Atlanta), both gave speeches that indicated the Fed could hike rates again as soon as June.

The next FOMC meeting takes place on June 14th and 15th and includes a “Summary of Economic Projections” as well as a press conference by Chair Yellen. The spread between the 2 and 10 year notes fell to its narrowest (flat) since late 2007 (around 94 basis points) on the news.


Regular cycle VIX options expire the morning of the next FOMC announcement (June 15th). Interestingly, over the past few weeks there has been considerable interest in the June 20 – 25 call spread. June VIX futures, which govern the June options have vacillated between 17 and 18.50 over the past 7 sessions. Early in May they traded as high as 19.45. The June futures haven’t closed above 20 since March 15, 2016.

Open interest (OI) on the June 20 calls is over 165,000, and on the June 25 calls, OI topped 273,000 today. The June 25 calls outright (not spread) have traded over 100,000 in the past two sessions.

In arguably related news, the CBOE Skew Index, which derives its value from the price of S&P 500 (SPX) tail risk, has been sanguine. The Skew Index has fluctuated between 120 and 130 of late. That’s compared to a range between 130 and 140 for most of late 2015 and early 2016.


The June VIX 20/25 call spread is trading around 70 cents today with futures at 18. We will keep an eye on this spread following the Fed Minutes and moving into the next FOMC meeting and expiration.