Options Signal Short-Term Complacency, Medium-Term Terror

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With one central bank meeting down, but two to go, VIX and VSTOXX (Europe’s VIX equivalent) have plunged to 2016 lows discounting any ‘events’ upsetting the complacency anytime soon. However, as Goldman’s options strategists note, the medium-term skew (3M to 1Y) are at or near record highs as traders prepare for turbulence amid ‘Brexit’, US elections, and of course the inevitable ‘Fold or No Fold’ Fed decisions later in the year.
Last week, the ECB delivered a predominantly constructive policy package. Over the next three days, the BoJ and the Fed will convene too. We expect the Fed to keep the rate unchanged, but also to signal that second rate hike is likely before too long.
VIX: From ‘Red Zone’ to ‘Dead Zone’
Despite some post-ECB market jitters, risky assets enjoyed a healthy rally and volatility fell sharply on both sides of the Atlantic. The VIX is at ytd lows, suggesting that the equity market is expecting no imminent rate hikes, and is pricing in the recent uptick in U. S. economic data.

This post was published at Zero Hedge on 03/14/2016.