It’s safe to say that most of the world is riveted by the news pouring out of the major (and minor) stock markets. Record declines followed by near-record spikes — besides being disorienting for anyone with a preferred direction — are uncomfortably reminiscent of early 2008 when volatility in pretty much every asset class soared, soon to be followed by an epic crash and the deepest recession since the 1930s.
Is this that again? Who knows, but when the Big One does arrive, its first week will probably feel a lot like this. So, happy watching.
In the meantime, here’s a brief selection of opinion and advice released in the past few days, beginning with a primer on volatility itself from the Associated Press:
The wild swings in the stock market this week have sent market volatility levels to heights not seen since the financial crisis.
Volatility can sound scary, but it’s a natural part of any market. Here’s a breakdown on how it works:
WHAT IS VOLATILITY?
In the simplest of terms, volatility is how dramatically a market moves from one day to another.
A trader once described market volatility as like the turbulence that can hit an aircraft. An airplane might be trying to get from 35,000 feet to 30,000 feet, but turbulence will cause the plane to move up or down a few hundred feet, or rock left to right, on its way there. The higher the volatility, the rockier the passengers’ ride is from point A to point B.
WHY DOES VOLATILITY HAPPEN?
First of all, volatility is not good or bad, it’s just another way to describe how the markets are performing.
But more often than not, heightened volatility happens at times of uncertainty in the financial markets. When traders have reason to be worried, they might sell or buy a stock in larger amounts than usual, causing the company’s stock price to whipsaw around.
HOW DOES WALL STREET MEASURE VOLATILITY?
There are a few measures, but the most quoted one is the Chicago Board Option Exchange’s Volatility Index, most often called the VIX. The VIX essentially measures how volatile that investors expect the market to be in the next 30 days. The higher the reading, the more volatility expected, but a reading of above 30 points is generally considered a sign there’s a lot of fear in the market.
The VIX hit a record of 80.86 at the height of the financial crisis. It has mostly remained below 20 for the last few years, with occasional but fleeting surges higher.
SO WHERE DOES THE VIX STAND NOW?
The recent shakeout of the financial markets has sent the VIX surging. It traded as high as 53.29 Monday, a level not seen since 2008-2009. The index has pulled back significantly from those levels, closing at 30.32 on Wednesday.
U.S. stocks rose on Wednesday, with the market on track to snap its six-day losing streak. It was still a volatile day, however, with the Dow industrials trading in a 420-point range, and the ups and downs were expected to continue.
Monday’s sharp selloff sent the CBOE Volatility Index .VIX, the market’s favored barometer of volatility, up 25 points to 53.29, the highest since Jan 2009. The VVIX Index .VVIX, the volatility index for the VIX, shot to an all time high of 212.22.
Though volatility is still high at 32.24 on Wednesday, it is off sharply from the high on Monday.
“I think the market is implying that yes, volatility may be higher going forward, but not to the same extent that we have seen in the last couple of days,” said Christopher Jacobson, derivatives strategist at Susquehanna.
Higher volatility expectations helps boost options prices. Traders who sell that protection – in effect betting on volatility to fall – have jumped at the opportunity to sell options to collect fat premiums.
“I think traders think there is a pretty good chance that we have seen the top in the VIX even if we haven’t seen the bottom in the S&P 500 .SPX,” said Bill Luby, chief investment officer of Luby Asset Management of Tiburon, California and publisher of the ‘VIX and More’ blog.
In that type of situation, those who sell puts and calls try to collect as much premium – the cost of an option – as possible while prices are high. Premium selling was likely a big part of options activity the last few days, strategists said.
“If you are of the mindset that the worst is over and that things are going to get better from here, then this is an ideal time to sell options premium,” said Randy Frederick, managing director of trading and derivatives for Charles Schwab in Austin.
David Miller, portfolio manager of Catalyst Macro Strategy Fund, said the fund had been lapping up premium over the past few months when it was cheap.
“We are selling premium now that premiums are significantly higher,” he said. The fund trades options on individual securities, international exchange-traded funds, and VIX ETFs.
Six days of declines, then the Dow surges 620 points: How volatility is roaring back into world markets(Financial Post) – Volatility has returned to stock markets with a vengeance.
After six days of consecutive declines, including some of the worst trading sessions in years, the Dow Jones Industrial Average surged by 620 points on Wednesday, or nearly four per cent, in its biggest one-day gain since 2011.
Wednesday’s gains were also enough for the S&P 500 to pull itself out of correction territory. The index had fallen by 11 per cent from its May highs as of Tuesday (a correction is defined as a pullback of 10 per cent of more). The S&P/TSX Composite Index also posted a big gain, climbing 230 points, or 1.75 per cent, to 13,381.59.
The recent large swings are a departure from the sleepy performance of markets in the past couple of years, which have left traders more accustomed to seeing a trading day average declines or gains of roughly one per cent. Analysts said the recent trading sessions are evidence that after a long period of low trading volumes, volatility has returned to the market — meaning buying on dips might not prove as profitable as it has in recent years.
“We are always wary of ‘catching falling knives,’” said Jeremy Hale, global macro strategist at Citigroup, adding that he and his team have elected to “stand aside and wait until things stabilize.”