High volatility is not the new normal, despite the recent market turmoil
London — Welcome back, tranquility. The first stages of restored market calm are under way, suggesting that a sky-high Cboe Volatility Index (Vix) is not the new normal, unlike what so many observers warned about after the recent turmoil. Instead, traders are pricing derivatives in a way that suggests equity swings will soon ease even further. Exhibit A: The Vix futures curve is back to normal. The curve tracks the implied volatility of the S&P 500 Index over time and typically forms an upward sloping shape — called contango — where contracts for months further out are priced higher than near-term ones. Put simply, traders usually demand a premium for the future since it’s less certain. After the February turmoil, the curve inverted — a tell-tale sign of stress called backwardation — as investors forked over a premium to protect against ongoing volatility. If history is any guide, a shift back to contango means that we could expect the Vix to hover around 14 to 15, according to Prav...
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