Much is being made of the drop in VIX today - with some suggesting it indicates confidence that investors believe the fiscal cliff resolution is closer. This could not be further from the truth. Investors had bought short-term VIX across the election and are unwinding that protection in the November futures contract but at the same, they are actively bidding for protection across the event-horizon of the fiscal cliff - out to Fedb 2013. The options market is absolutely not pricing in a fiscal cliff resolution and in fact is just beginning to price in the expected rise in realized volatility as the market becomes increasingly headline-sensitive once again.
The shift across the fiscal cliff barrier explains why short-term VIX looks more complacent as the medium-term VIX is bid...
As realized vol is on the rise so there remains plenty of room for implied vol to run higher...
Chart: Bloomberg