NEW YORK, Jan 27 (Reuters) - As concerns over the spread of the coronavirus rattle stocks, a corner of the options market is signaling that the current selloff may be short-lived.
The term structure between first-month futures and second- and third-month futures on the Cboe Volatility Index inverted for the first time since early October.
Historically, stocks have tended to rebound soon after the VIX term structure inverts. Over the past decade, the benchmark S&P 500 stock index has tended to recoup its losses a week after such an inversion, Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group, wrote in a note on Monday. Two weeks after an inversion, the S&P 500 has on average risen 0.88%, and a month later, it has advanced 1.7%.
The volatility term structure, which is calculated from prices of VIX futures with different expirations, reflects the market's expectation of volatility in different time horizons.
Usually, the term structure slopes upward from month to month, as anticipation of outsized stock moves increases as dates move further out on the calendar. An inversion reflects greater anticipation of a significant market move in the near term than further in the future.
An inversion of the VIX term structure is "one of many potential data points to look out for a buying opportunity," Murphy told Reuters. (Reporting by April Joyner; Editing by Ira Iosebashvili and Leslie Adler)