The Back Alley Archives

I told you yesterday, that's been the pattern with these Fed cuts of late. Now here's an interesting quote to consider, which I'm stealing from The Big Picture blog:

“There’s a saying on the options floor, that you buy low volatility and sell high volatility, but when it gets very high, you buy it,” he says. “High volatility, you sell, but extremely high volatility is telling you something, and markets tend not to price in that kind of move.”

-Steven Gross, a principal at Penso Capital Markets LLC

So what does extremely high volatility tell us?

So what does extremely high volatility tell us?

Extremely high volatility is telling you that there is a lot of uncertainty in the market. Usually all known factors are priced in to the markets. Right now, there's a lot of fear about what we don't know, so you get these big swings where people are panicking.

What sort of theories are out there about how to best take advantage of extremely high volatility? (I'm not sure how ridiculous my thoughts/questions on this board may be...never even took an Econ class in undergrad, never really studied the markets)

I guess that depends on your play aa. If you are in the market for a long term gain, you ride these out and don't do anything. If you are looking for short term gains then you have to play the market like out a1ce in the hole.

What sort of theories are out there about how to best take advantage of extremely high volatility? (I'm not sure how ridiculous my thoughts/questions on this board may be...never even took an Econ class in undergrad, never really studied the markets)

I've seen different plays on it, but like Todd said, they're typically shorter term and not something the everyday investor is going to try.

For instance, when volatility started to tick up last year, my firm loaded on on call contracts for a index that measures market volatility, the Vix. We unloaded the position over a two and a half week period in summer and made a good profit on it.

I also once read an interview with an options trader who loaded up on both puts and calls on the S&P 500 in September of 1987, because he thought the market had begun to behave erratically. He didn't know which side the market was going to move towards, but was convinced it was going to be a big move either up or down. It crashed in October and he made a ton of money selling the put contracts, while letting his calls expire.

from where i sit, volatility is a good thing....it means that there are differing views of the market...some are bullish, some are bearish....some are long term, some are short term...volatility is good for business as it creates opportunities to cash in.

having said that, too much volatility creates a 'deer in the headlights' effect and causes some to sit on their hands for more data and more guidance on the market....THAT'S not exactly good for an investor or a brokerage firm as well...moderate volatility...one that creates varying views on any given topic..

What defines "low" "medium" "high" and "extremely high"? Im guessing there are ranges on the ViX that can 'technically' correspond to these...

VIX over 30 is one rule of thumb I've heard for oh shit levels of volatility.

VIX over 30 is one rule of thumb I've heard for oh shit levels of volatility.

i might have the 3000th post if we mysteriously delete tips.