A Risky Arbitrage Play

An intriguing start to the morning with a slightly red equities market even as the CBOE Volatility Index (VIX) craters 10%. The most interesting part is the VIX futures are down, but only down slightly when compared to the VIX cash. A contango of more than 20% between the VIX cash and March futures with only a little over a week until expiration seems insane. We will have equity options expire before the VIX this month, along with a dividend on the SPDR S&P 500 (SPY) this Friday, so there could be a little anticipation trading going on in the options market, but the impact should be negligible since neither of these are unknown or unanticipated events.

It is a bit of a head-scratcher here. I do expect the VIX to move higher either later today or tomorrow, but I still see little potential to play it since that will be on the cash side, not the futures, so the ETNs and ETFs won't be of much help. The VIX March call options seem to be pointing to an expected move back toward 19 if you look at the in-the-money and slightly out-of-the-money calls. Basically, I wouldn't get too bullish based on the early-morning VIX action....244 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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