Using the S&P 500 stock index as a proxy for the stock market, today we saw a modest uptick. It’s now back within a normal range. Realized volatility as measured by the average true range of the past 14 days has trended up. Volatility isn’t directional, so a volatility expansion involves but down and up days.

Implied volatility of the S&P 500 stocks had a sharp move up and settled back down some today. Applying the same realized volatility measures to the VIX is a view of the realized vol of implied vol. Yesterday may turn out to have been a good time to exit long volatility positions, or maybe it explodes from here.

The VIX futures term structure closed 10% contango. The December VIX futures are 10% lower priced than January. The curve is flatter beyond February.

This contango creates a headwind for VIX ETFs that roll each day as they sell the January futures at a lower price and buy the February at a 10% higher price. It’s why the VIX exchange-traded funds and notes trend dow long term. So, they aren’t suitable for anyone to hold for long.

VIX may stay within the range and the stock market trend back up.

We’ll see.

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

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