We begin with assessing actual market movements in an attempt to determine the extent to which volatility has manifest itself over the past few weeks. The metric of choice for most traders is historical volatility (HV), also sometimes referred to as statistical, realized, or actual volatility. With today’s blip lower, 21 day HV on the SPY sits at 25% – its lowest levels since early August.
Next, we turn to market expectations for future volatility as reflected by the VIX and VIX futures. Given the notable weakness in the VIX over the past couple trading sessions, it has fallen to 23.60 – a level also not seen since early August.
Concurrent with the drop in the cash Index, VIX futures have receded as well. With December futures expiring next Wednesday Dec. 21st, they are beginning to become particularly sensitive to day-to-day movements in the VIX Index. Given the recent shellacking, Dec futures sit at a notable discount to Jan futures (26.15 vs. 29.2). From Jan onward the term structure flattens significantly, yet still remains in contango.
As expected, the comeuppance for VXX bulls has arrived on schedule. The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX), will continue to suck significant wind as the remainder of December futures are rolled to January.
Tyler Craig, author of Tyler’s Trading and owner of TC Trading, Inc. Over the years I’ve educated hundreds of traders through my work with one of the nation’s leading educational firms. I enjoy writing and am a current monthly contributor to the Wealth Intelligence Magazine. My writings have also been featured in Expiring Monthly and frequently show up in the Abnormal Returns Options Newsletter. In 2009 I started Tyler’s Trading to share daily market commentary on stocks and options.