Tomorrow is VIX expiration, and, as SpotGamma notes, we head into that expiration with an elevated VIX structure. If you compare today’s VIX term structure to that of mid-November you can see current levels (black) remain well above Nov(blue).
Nov is “pre Omnicron” and “pre Taper” so it makes sense that current prices are elevated – but we suspect that the VIX expiration will start to drag current prices lower as traders roll.
But while vol is expected to compress in the short-term through OpEx and the new year, Goldman’s Rocky Fishman points out that markets are pricing increasing volatility in 2022.
Volatility has been on the move in the final weeks of 2021, with unusually high volatility of VIX futures. The high vol-of-VIX is a fitting end to a year characterized by sharp transitions between low and high realized volatility.
For the year as a whole, S&P 500 realized volatility has been marginally higher than 2019’s pre-COVID level, but derivative markets have seen things differently: investor risk aversion has left implied volatility in a consistently higher range than it had pre-COVID.
In 2021, realized volatility returned to pre-COVID levels, but implied volatility did not.
Many skew metrics (e.g. SPX and E-Stoxx 50 1M normalized 25-delta) and volatility risk premium metrics (e.g. VIX minus 13-day exponential realized vol) have had higher median levels in 2021 than ever before.
We see these as indicators of pervasive risk aversion as investors assess the likelihood of a return to 2020-like volatility rather than as a wave of protection buying.
As markets processed news around the Omicron variant, the Fed’s accelerated tapering, and Washington’s fiscal package, implied volatility has oscillated strongly. The VIX moved from the teens to the 30’s to the teens and back to an intraday high above 27 on Monday (20-Dec). One-month realized volatility of the benchmark long VIX futures strategy is now in its 98th percentile compared with the last 15 years.
The sharp swings in volatility reflect investors trying to balance the potential for weakening liquidity and systematic funds’ selling to drive up volatility in a further selloff, vs. increased clarity around key catalysts potentially driving realized volatility back toward mid-2021 lows.
This uncertainty is highlighted by the elevated, longer-dated skew…
Finally, Fishman expects moderately higher realized volatility in 2022, largely driven by increasing intra-SPX correlation in a macro-led market, but not nearly enough volatility to justify current index implied vol levels.
In early 2022, we expect heightened sensitivity to economic data as investors try to resolve uncertainty about the trajectory of inflation and the timing of the Fed’s initial rate hike. Deeper into 2022, we expect mid-term elections to become an area of focus.
In Goldman’s view, this environment will continue to favor option-selling strategies; elevated vol risk premium will be a headwind to long volatility strategies.
So expect more dip-buying and more v-shaped recoveries until the fingers picking up those short-vol premiums get snapped off under the steamroller.