Now we’re seeing some volatility expansion

I suggested in Is volatility setting up for an expansion? we may see volatility increase.

Sure enough, implied volatility, as measured by the VIX, has trended up from 12.16 to 15.30, which implies the expected volatility over the next 30 days has examined from about 12% to 15%.


The bands around the price trend below use a measure of realized historical volatility (standard deviation) over the past 20 days. As the realized volatility has contracted, it signals the range of prices spreading out has been narrow. This is an uptrending, quiet, market condition. When I see one market condition like this I’m alert for it changing.

bollinger band spx

In the next chart, we observe another channel of volatility around the stock index measured with average true range (ATR) and it has been a tighter band. The stock index price has also been pushing the upper boundary since the beginning of the year.

spx atr channel position sizing

Periods of low and contracting volatility are often followed by periods of higher and expanding volatility.

On the other hand, here we see the realized volaltity of implied volatility has reached its upper band, so if it remains within a normal range, it may remain inside the band. However, it can certainly spike up if the market expects higher movement.

vix volatilty of volatlity

So, Semper Gumby, always flexible.

This uptrend could change.

I know when I’ll exit all my positions if they trend down enough to cut my losses short. I also know what percent of drawdown that would lead to if all of my positions decline together. If I wanted, I could tighten it up to reduce the drawdown if prices fall more. Or, I could hedge with a short index position or go long volatility.

You can probably see how everyone decides what they get from the market.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

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