Friday’s volatility spike keeps fading, but the curve still refuses to pay anyone for believing in the calm. Our regime read stays AMBER, continue defensive posture.
Spot VIX sits at 18.87 this morning, down from Friday’s 19.99 close and Monday’s 18.44 settle, so the fear gauge itself has cooled. The term structure is the problem. October futures, which expire tomorrow, sit at 18.50. November is 19.00 and December 19.03, which makes the front spread just +2.70% and the middle of the curve essentially flat. On a typical day that front spread runs closer to 6%. There is no slope here, and with no slope there is no roll-down income for short-volatility structures. The premium on offer is thin compensation for the risk underneath it.
Positioning agrees with the curve. Dealers remain net short gamma after Monday’s close, with the gamma flip sitting just above where the S&P 500 closed and the put wall below near 7,500 still building. In plain terms, dips are more likely to be sold into and rallies leaned against until that positioning clears. About a third of the short gamma expires this week, with another large block expiring October 30, just after the FOMC.
The calendar is why patience matters. Tomorrow’s October expiry makes November the front contract, the nearest one to expiration, and November is loaded: the October 27-28 FOMC meeting, the September PCE report, October payrolls, CPI, and the November 3 midterms all price into that one contract. December behind it holds the December FOMC, where a rate hike remains heavily priced. This morning’s soft housing starts print (covered in today’s Macro Data post) nudged futures lower and yields down, but it does not change the volatility picture.
What changes the read: the spread between the front two contracts rebuilding real slope after tomorrow’s expiry, or a spot VIX that stops respecting the high teens. Until one of those happens, we stay defensive on short volatility: no unhedged short vega, wider wings, and no hurry.
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