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The last two weeks witnessed a nice VIX rumble with a brief spike above the 30 mark setting some screens abuzz with flashing lights. The good news is that VIX is now back into safe mode with ongoing economic fundamentals trumping ‘shock’ anxiety.

As a previous post noted (see: Implied Volatility Squared), this was, to a certain extent, priced in to VIX’s own implied volatility curves.

The high implied vol’ mark-up present over the front-month option months (that expired March 16th) needed to be priced through and across the expiry month. Add to that, the ongoing pricing through of previous VIX term-structure related contango, a little earthquake with radioactive aftertastes and fighter-jets buzzing down to North Africa and we were in for a nice little storm in a teacup moment.

VIX’s Contango From Here

Going back on the VIX term structure, we can see that the past market anxiety over VIX, previously discussed in the growing contango over its term structure through the second half of 2010, is now receding.

The VIX term structure appears slightly more subdued compared to start of year pricing as the next two graphs illustrate.

VIX Term Structure Jan 1st 2011

VIX Term Structure Jan 1st 2011 - Note the eager contango of 30.57% across first-quarter prices

VIX Term Structure March 25th 2011

VIX Term Structure March 25th 2011 - As of last Friday: a more subdued VIX front-end with a 17.65% spread over the front-quarter

Where To From Now?

Therein is the money question but it is good to know that the VIX contango, built-up over last year, served its purpose of pricing in some of the risks of this first quarter.

Admittedly, it is quasi-impossible to forecast all the risks that can be (eg. Earthquake/Tsunami/Nuclear Meltdown/Civil War). But maybe, as the VIX curve demonstrated, it is still possible to price their potential impact? Perhaps… Certainly, as this FT article notes, some people are already starting to wrangle over the potential of a slightly too vexatious VIX.

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