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Stocks have dipped a couple of percentage points, but so far there's no indication at all of any unusual behavior. A look at the

CBOE Volatility Index


futures market tells us what we need to know.

The VIX futures term structure is in contango, which is a Spanish word meaning "straightforward and ordinary market." Actually, in fact it just means that SPX options markets are expecting normal price action over the next eight months. The spread between August and November futures was about four points at the close on Tuesday. That's not a record-wide spread by any means, but this is also not a raging bull market. Two weeks ago, the August contract was trading about $0.40 lower, but the November contract was, too: the whole curve has ticked higher a little, but has not flattened significantly, and that's another good sign for the bulls.

Fig. 1. VIX Term Structure

Source: CFE

View Chart »

The spot VIX, at 20.47, is more than a point lower than the front month futures contract, which means this week's little pop in the VIX is nothing special. Any time VIX makes a nominally significant move - for example, jumping nearly 10% on Tuesday - you'll see a headline or two noting the fact with a little awe. Traders know better.

Another part of the VIX futures curve to keep an eye on is the December contract. You can see in the attached chart that December didn't keep pace on Tuesday with November and January: there's a little dip in the curve, implying a December value closer to 25.90 or so. This drag is a common seasonal feature, as the holiday period is associated with slower markets and less volatility. At the same time, anything can happen in the markets, so for regular volatility sellers, I suggest looking at November and January contracts instead.

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At the time of publication, Jared Woodard held positions in VIX and SPX.