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My team and I solely focus on the front of the term structure due to the reflexivity effect In this market microstructure.
Post covid we have not seen a true “risk off” event, where panic has set in to fuel this reflexive action to the downside.
Post covid we have not seen a true “risk off” event, where panic has set in to fuel this reflexive action to the downside.
However, the factors that attribute to this reflexivity have gotten worse (to an extent). Yes short vol is not at the same level we witnessed pre covid, but there are more factors to this puzzle than just that.
I believe the next real risk off event will be met with circuit breakers faster than usual. Mainly due to the reach for downside puts. MMs will counter this action the same way we have seen to the upside (jack the Vols) this action has reflexive implications on $VIX & VX1 pricing
For those that think “$VIX will never get over covid highs” you are wrong and I would argue that we will see it blow through those highs... along with a situation where Spot is flat and vol is rocketing (MMs raising Vols sky high in a fast rate to slow down the gamma effect)
If you are trading 6M & up vol, you may need to really think about the monetization process in a risk off event. I think this market will offer the widest spread ever between the front & back of the term structure solely due to structural issues.
