The more I try to find ways of making money in the markets the more I come back to volatility.
Volatility wasn't even on my radar as a trader in previous years, but now I follow it very closely.
If you have followed TastyTrade at all you know their whole "thing" is volatility. However, I think they carry it too far. There are of course ways to make money in low volatilty environments and Sosnoff is famous for not ever going long stocks even coming off of a very long term bull-market.
Personally, I think he got burned in 1987, and has leaned bearish ever since. (Conversely, it was one of Tony Batista's best ever days.)
They do go long, but mostly in spreads, or they sell puts. They always seem to be short stock index futures and rarely, if ever, play them from the upside.
As you can see by the chart over the last two years we have had six major volatility spikes. I've listed the reasons for five of them on the chart.
Most of them are world and or economic events, which are beyond anyone's control, and often time come right out of the blue.
This quote from a
2016 Barron's article explains it best:
"HISTORY SHOWS, however, that the types of issues that tend to trigger a dramatic spike in volatility are those that were not on the radar until the last minute, if at all. Recent examples include the Arab Spring, the Ebola crisis, Russia’s invasion of Ukraine, and China’s devaluation of the yuan. These are the types of events that almost certainly didn’t appear on any list of top concerns in the previous December."
The August 2015 spike in volatility from the same article:
"For example, during the market’s August turmoil, the CBOE Volatility Index, or VIX, rose more than 100% in a week for the first time in its 23-year history. The VIX measures the level of fear and uncertainty priced into Standard & Poor’s 500 options.
That same week, the VIX registered two of the four largest single-day spikes in history—in consecutive trading sessions, no less. Earlier in the year, volatility in emerging markets and crude oil narrowly missed hitting all-time highs."
That August spike was attributed to China and oil. Fear run amok.
But also notice on the chart how relatively quickly volatilty contracts once cooler heads prevail. VOL never seems to stay high for long periods of time. A lot of this has to do with the way volatilaty derivatives are constructed, but be that as it may trying to predict volatility spikes is guesswork at best.
I was long VOL when the Fed last raised interest rates and I got stopped out on that trade when the markets just yawned.
Now look at the September 2016 spike on the charts where the mere "mention" of interst rate hikes sent the Dow down 400 points in one day and you can see there is really no way to predict how markets will react. You can guess, but that's about it.
So what will cause the next rise in VOL? Most likely an unpredictable world event, or the cumulative mix of uncertain economic news, or both.
Either way, the chart tells us two things:
1. Trying to predict spikes in volatility is futile at best
2. When VOL does spike you should take advantage of it quicky...because high volatility doesn't stay around for long.
