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Where is Vol Headed?

The market has been trading as if we are preparing for a correction, ready to burst back through the 1200 level on the S&P 500 at any moment.  With that feeling, I have reduced some risk in my portfolio.  Despite my risk reduction, I still have the feeling that the market can move higher and volatility can grind tighter as we move through the holiday season.

Low historical volatility, but plenty of downside left

The other disconnect is with the VIX futures curve as usual.  The spot VIX has fallen to 18.64, but the Dec 2010 is at 21.05 and the Jan 2011 is at 24.3.  The gap between the Dec and Jan contracts is very close to its wides:

Sell Jan, Buy December?

I am still short the Jan 2011 contract, but I have a hard time closing out the position with this gap so wide.  Maybe I will take the lest risky position and go long Dec until this gap closes.

Posted in Derivatives, Markets, Trading Ideas.

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