Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s)
With spring
training just getting underway in Florida and Arizona, I think it is
appropriate that I once again have an opportunity to pinch hit for Steve Sears
in his The
Striking Price column for Barron’s.
Today’s column is called Putting
Low Stock Volatility to Good Use (my title suggestions always seem to end
up on the cutting floor) and builds upon some of the ideas I presented three
years ago in Low
Volatility: How to Profit from a Quiet
VIX.
If my memory is
correct, this is the twentieth time I have been a guest columnist at Barron’s
in this fashion and in keeping with tradition, I always try to make the column topical,
particularly when there are some aspects of volatility that have investors more
perplexed than usual. Lately, it has
been the persistent low VIX readings (including the first sub-10 VIX print
in a decade) in conjunction with a new administration and extremely high policy
uncertainty that has been difficult for investors to digest. While I too have dedicated a fair amount of
effort to square low volatility with high policy uncertainty, my research
related to volatility has made it easier to stick with the trend instead of
trying to anticipate a market turn.
Specifically, in
the Barron’s article I note:
“Statistically, it turns out that the
vaunted mean-reverting aspect of volatility is much more likely to kick in with
a high VIX than a low VIX. Similarly, low volatility tends to cluster and
persist for extended periods, defying skeptics. Specifically, when the VIX dips
below 12 for several months, the historical record shows it can be expected to
continue with similar readings for two years or more.”
As Barron’s is
not necessarily the best place to try to shoehorn original research into a
short column, I thought I could use this space to expand upon some of the
points I made. Specifically related to
the clustering
of low volatility, the graphic below shows that when the VIX closes below
12, it tends to persist in these low readings, clustering for several years,
before remaining above 12 for even longer periods during high volatility
regimes.
[source(s): CBOE, VIX and More]
A corollary to
the above is that while investors often focus a good deal of their VIX analysis
on mean reversion,
it is important to note that mean reversion is much more predictable and
tradeable following a VIX spike than after a significant decline in the VIX.
There are some
other interesting statistics and ideas in the Barron’s column that I will
address in other posts shortly, not the least of which addresses the
performance of the SPX in the years following extreme high and extreme low VIX
readings. Stay tuned.
Finally, since I
enjoy being a pinch hitter so much, I thought I might highlight one pinch
hitter for every new Barron’s column I write.
This time around I’d like to put the spotlight on Rusty Staub, who just
happened to be at the zenith of his pinch-hitting duties when I moved to New
York. In the twilight of his career, the
charismatic Rusty tied a National League record in 1983 with eight consecutive
pinch hits and also tied the Major League record with 25 RBI from those (24)
pinch hits. Rusty finished his career
with exactly 100 pinch hits and is currently 19th on the all-time
pinch hit list. I realize I have a long
way to go to get to Rusty’s rarefied air, but 100 pinch hits is something to
shoot for.
Related posts:
- My Low Volatility Prediction for 2016: Both Idiocy and Genius
- Was the VIX Too Low in 2013? No…
- A VIX of 15!?! Meet the New Reality
- S&P 500 Index 20-Day Historical Volatility Hits 39-Year Low
- Anchoring and a VIX of 20
- How Low Can the VIX Go?
- Where Will the VIX Bottom?
- VIX High or Low? It Depends…
- VIX Median Reversion and Five-Year Moving Averages
- A VIX Risk Reversal
- Why VIX Puts Get Cheaper in More Distant Months
- Putting Low Stock Volatility to Good Use (February 18, 2017)
- How to Play a Volatility Spike (November 5, 2016)
- Playing Volatile Oil Prices (March 12, 2016)
- The Case Against High Stock-Market Volatility in 2016 (January 2, 2016)
- Seizing Opportunity from Stock Market Volatility (July 11, 2015)
- How to Ride an Aging Bull (November 29, 2014)
- Investors' Best Options in a ‘No Fear’ Market (July 2, 2014)
- Low Volatility: How to Profit from a Quiet VIX (May 22, 2014)
- Emerging Market Stocks: Have They Hit Bottom? (March 28, 2014)
- How to Spot Risk Early (July 16, 2013)
- How to Insure Your Stock Portfolio (April 18, 2013)
- The Case for Options Trading (January 2, 2013)
- Calm Down and Exploit Others’ Anxieties (November 14, 2012)
- How to Trade Options Around Volatile Events (July 10, 2012)
- Be Greedy While Others Are Fearful (May 3, 2012)
- Ways to Turn Volatility into an Asset Class (January 12, 2011)
- There’s Opportunity in Uncertainty (November 18, 2010)
- Will Market Volatility Return to Crisis Levels? (September 15, 2010)
- The Perils of Predicting Volatility (May 20, 2010)
- Take a Longer View on Volatility (July 2, 2009)
Disclosure(s): the CBOE is an advertiser on VIX and More
