I discussed how the VIX has finally broken down below its 50 day moving average, indicating that short term market volatility may be headed lower as bond insurers shore up financing. Feel free to listen to Bloomberg’s podcast of my interview,
So, how should you play this move? Customers have been seen sellling front month VIX futures and buying back month futures, a play that tends to be a bullish spread. Other ways to play a near term drop in volatility would also be to sell out of the money calls in Mar VIX options, anticipating these calls will expire worthless. This strategy is more risky than the futures spread and requires more capital but has a possible huge payout.
Still, keep in mind that overall volatility remains high as concerns over recession and high inflation developing abroad in Asia will keep uncertainty in the marketplace. This is reflected as back month VIX futures remain bid above the index cash level.