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Volatility Nowhere in Sight: VIX Posts Record Low Quarter

Is this the calm before the storm or has the Fed managed to crush volatility forever?

The Wall Street Journal reports VIX Just Finished Its Calmest Quarter Ever.

Market volatility is nowhere in sight as the final stretch of 2017 kicks off.

The CBOE Volatility Index, or VIX, just finished its calmest quarter in history, averaging just 10.94 over the past three months.

The gauge has fallen for three consecutive quarters, its longest streak of declines since 2011, according to the Journal’s Market Data Group. The VIX uses options prices on the S&P 500 index to produce a measure of expected stock swings over the next month. It tends to fall when stocks are rising, and vice versa.

But the absence of volatility hasn’t tapered volatility trading itself. Even as the gauge capped off its quietest quarter ever last week, one trader pushed through one of the biggest VIX bets in history, and drove the total number of VIX options traded to a new daily high of over 2.6 million contracts.

The record trade could cash in if futures contracts on VIX crossed the 20 threshold come December–a level the index itself hasn’t crossed all year–but lose money if it rose too much higher, analysts said. The wager extended a trade initially made for October, and entailed selling bearish put option contracts with a 12 strike, buying bullish call options with a 15 strike while selling call options with a 25 strike. All of the contracts expire in December.

But others don’t see the calm ending. Volatility has fallen so low this year that the Chicago Board Options Exchange has had to introduce new, lower strike prices–or the level at which contracts can be executed. Investors can now wager that the VIX could sink as low as 9.

VIX Daily

Vix Weekly

The WSJ did not say who the trader is but it appears to be billionaire bond guru Jeffery Gundlach.

I wrote about his trade on August 8, in Is Gundlach Really Bearish? (Here’s a Hint: No)

“I think going long the VIX is really sort of free money at a 9.80 VIX,” said Gundlach.

Gundlach expected to make 400% on his bet. Immediately following his statement the VIX spiked and I suspect VIX calls doubles in value, but are now underwater.

Whoever the WSJ was talking about has now upped the ante and in a way that can lose if the VIX does not get to 20 or if it gets too high.

Mike “Mish” Shedlock

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