VIX Futures In Contango, Upside Protection Purchased (Call Spreads) - Charts

S&P 500 vs. VIX (stockcharts.com)
Index futures are up 1.3% this morning. The BLS releases U.S. employment data at 8:30 (EST). The S&P is testing the 200 day moving average resistance level and the VIX is at 200DMA support (or just above it). Yesterday, on the Option Monster Volatility Sonar Report, Jamie Tyrrell, of Group One Trading, reported that the VIX futures curve is in contango (front month prices < back month, see chart below) and customers bought VIX December call spreads, or upside volatility protection, to hedge against negative market catalysts. He said on 11/30 a customer bought 55,000 December 45-60 call spreads for $0.32, and on 12/1 a customer bought 10,000 December 32.5-42.5 call spreads for $0.95. VIX Cash and the December VIX Future closed at 27.41 and 27.90. The VIX, or Volatility Index, is calculated using S&P 500 options prices. I added the Optionmonster video after the jump.

During the week, coordinated actions by central banks to lower the cost of Dollar liquidity, and China's move to lower its Reserve Requirement Ratio (RRR), put a nice bid under asset markets. We'll see how the markets react to the employment report. Monitor ECB (European Central Bank), Federal Reserve and Congressional news closely this month. Here are articles to read:

*Merkel urges euro fiscal union to tackle debt crisis (BBC)
*ECB opens door to action, Sarkozy seeks (Reuters)
*European Central Bank head hints at more action if euro countries curb spending (Washington Post
*Central Bank Chief Hints at Stepping Up Euro Support (NY Times
*Fed Officials See No New Move (WSJ)
*Barclays' Maki: Extend Payroll Tax Cuts or Expect QE3 (Newsday)
*House GOP Bill Renews Jobless Benefit (Time)

David Rosenberg, chief economist and strategist at Gluskin Sheff, and Komal Sri-Kumar, chief global strategist at TCW, think more shoes could drop in the months ahead before the Eurozone sovereign debt and banking crisis gets resolved. Will sovereign debt haircuts, bank recaps and nationalizations be the catalysts for a nice capitulation event? Watch them discuss the Eurozone crisis on Bloomberg TV at Business Insider.

Here's a chart of the VIX futures curve using CBOE quotes. Click the charts for a larger view.


VIX Cash is around the 200 day moving average again (red line)

Volatility Index 1-year ($VIX)

Volatility Index Since 2008 ($VIX)
Chart sources: Stockcharts.com




Courtesy of optionmonster.com

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