Is A Volatility Explosion Possible? (Preview)

By Lawrence G. McMillan

The 20-day Historical Volatility of the $VIX futures (middle row of the table below) is now exceedingly low.  This will not last, and one can expect some sharp movements in the ensuing weeks, but the timing of such a move is not clear.  There have been articles on Bloomberg and elsewhere in the past week, discussing how speculators (which they classify as “smart money” – although I’m not sure how they’d know that, except possibly for the size of the trades) have been loading up on on the $VIX March (18th) 23 and 24 strikes calls.  The articles claim that market makers would be extremely short volatility at that level and could accelerate a volatility push to the upside should the March futures trade that high.

As we know from past actions, if March futures were to get in that neighborhood, certain parties might attempt to buy enough futures to trigger that volatility explosion – similar to what happened in February 2018, although for slightly different reasons.  

These calls are not cheap, in terms of implied volatility:

$VIX Mar (18th) 23 call: 0.82 (158% implied vol)
$VIX Mar (18th) 24 call: 0.75 (165% implied vol)

Current $VVIX, which measures the volatility of $VIX (i.e., the volatility of volatility) is near 100%, so one can see these options have a healthy implied volatility premium built into them.  Still, their actual dollar price is not bad for a speculation.  So, just in case these Bloomberg authors are correct, we are going to take a small speculative position...