02/17/2022 — Vol Shy

This small child is scared to death of volatility, and rightfully so.

volatilityAs a trader, extended periods of volatility above historical volatility tend to be seen as blessings. Trade flows better, you can be in and out of positions faster and easier without having to sit on your hands too long, or assume too much risk to make too small of a profit. Historical in the S&Ps rests in the area of 18, so this continued run in the mid 20’s, sometimes playing in the 30’s should be a good opportunity to make a bit of coin, and it mostly has been.

Problems can arise, or perhaps it’s better to say that the trading can look a bit less rosy, when the market moves very erratically, or a large and fast downdraft isn’t accompanied by an appropriate rise in volatility. At today’s close, the SPX had fallen to a level around 4370, and the VIX (a decent indicator of overall SPX volatility) had risen to 28. There was good trade to be had, but probably not as good as it should have been.

The last time the SPX was down in the 4370 area was only this past Monday from around 12:45 to 1:15 Central. During this interval, the VIX was hanging out in the 30.50 range. Could this be hinting that the volatility at the bell was too low? Maybe.

However, thinking that this is a great opportunity to buy might be a little short sighted. Adopting a strategy that gets you long too much volatility, could be very problematic. At 28, vol has 10 solid points to drop before we get back to the norm, and although that is very unlikely to happen tomorrow, being after Thursday’s close now, it could easily happen, by say…Tuesday morning (still very unlikely considering the current state of world affairs).

Why does it look like volatility might be lagging? Longer term considerations include the pandemic and interest rates, which have been considerations for quite some time. A couple things that might be a bit more time sensitive would be the potential government funding shutdown, or the pending Russian invasion of Ukraine. My guess would be that the lagging vol is due to people favoring that the government will strike a last minute deal (they usually do), as opposed to Russia doing the sensible thing (they usually don’t).

So where does that leave vol? It’s still in a great position to trade — sensibly, and within one’s financial means.

Nothing new there.



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Willie Witten

Willie Witten

Writer, thinker, trader, musician, builder and beer aficionado. Find me at williewitten.com, or onespinmusic.com