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Is VIX "Exuberance" Premature?

 January 11, 2013 11:55 AM


VIX has been hovering near multi-year lows as investors become comfortable selling volatility. With the Fed being an implicit seller of volatility via MBS purchases (see discussion), some view it as an easy trade. In fact some traders are positioned for a "carry trade" (given how difficult it is to get carry in other markets with rates at the lows), as options decay works in the volatility sellers' favor. Market participants have discounted the impact of near-term uncertainty, particularly the impending debt ceiling negotiations. But with Washington gearing up for a fight (and Mitch McConnell actively pushing for major entitlement cuts) is this "exuberance" premature?
Market Watch: - "I would expect (the VIX) to rise over the next two months until the next deadline and resolution date" in Washington are reached, said Ron Rowland, president of Capital Cities Asset Management. "It may be just barely trending, as opposed to rallying, but I think it's general direction will be upward."

[Related -Sector Rankings Stay Neutral With Few Bullish Catalysts On Horizon]

Frederick foresees low volatility in the VIX, within the 13 to 16 range, until late February or early March, then a pick up just ahead of the debt-ceiling deadline. "If (lawmakers) look like they are going to push it right down to the wire, and I'll be shocked if they don't, (the VIX) is going to run up again just like it did in the two or three days before the fiscal cliff occurred."

At this stage it is difficult to see VIX moving materially lower and the risk seems to be to the up-side.
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