February 15, 2018 / 6:21 PM / in a year

U.S. stock volatility shock wanes, VIX futures signal smoother sailing

NEW YORK, Feb 15 (Reuters) - U.S. stocks may have recovered only about half the ground lost in the recent selloff, but traders in the derivatives market are fast dialing down their fears of more ructions.

The CBOE Volatility Index, the most widely followed barometer of expected near-term volatility in the S&P 500 , while not quite back to where it was before last week’s slump in equities, has retreated sharply from the high of 50.3 hit on Feb. 5.

The index was last up 0.34 points at 19.6 on Thursday.

“Fear has come down dramatically but certainly not the level of complacency seen pre-correction,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas.

The VIX futures curve, a snapshot of prices of futures contracts on the volatility index across different expirations, also painted a less fearful picture.

The curve moved into backwardation over the last two weeks, meaning investors were paying more for near-term insurance than for contracts that would protect them farther out in time. That rare situation highlighted the extreme level of fear of further near-term losses for U.S. stocks.

On Wednesday the backwardation had reached its most extreme level since Aug. 11, 2011, when rating agency Standard & Poor’s downgraded the United States’ credit rating.

With Wednesday’s expiry of February VIX futures, the curve was approaching its more typical contango, where investors pay more for farther out contracts than for near-term contracts.

“Any time the front-month contracts expire, you immediately see a big adjustment in the curve,” said Frederick.

VIX futures imply investors expect the VIX to remain in the 15 to 18 range over the next few months, he said.

U.S. stocks were little changed on Thursday, after four straight days of gains for the S&P 500. Blue-chips Apple Inc and Cisco Systems rose as investors shrugged off fears of rising inflation and hunted for bargains. (Reporting by Saqib Iqbal Ahmed; Editing by Daniel Bases and Meredith Mazzilli)

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