Hurricanes and the VIX

Lest anyone wonder, I was absolutely kidding when I decided to append the “Your one stop VIX-centric view of the universe…” tagline to this blog when I created it. That doesn’t mean, however, there might be more than a little truth embedded in the tagline.

I had planned to talk at considerable length about hurricanes and the VIX during the past month, recognizing that August is when tropical activity typically kicks in to high gear. Given all the non-weather volatility we’ve had, it looks like I’m going to need a lot more back burners to hold all those boiling pots.

Speaking of which, we now we have tropical storm Dean bearing down on the Gulf of Mexico, apparently destined to become a hurricane force storm in the next 24 hours. I have included the current computer consensus path in the graphic below, but consider that the breadth of the ‘projected path’ is about 650 miles wide 5 days out before you start to draw any conclusions, then remember how fraught with uncertainty these projections can be.

As Dean approaches, I will opine more about the potential VIX and oil-related trades (I’m going to keep it simple and skip the insurance and other aspects of this gambit) that are possible with oncoming hurricanes. Keep in mind that while New Orleans is the landfall site that is most likely to garner the most press, there is a high concentration of refineries that span the Texas and Louisiana coast. If you want more detailed refinery information in map form, check out where the major vulnerabilities are in Texas and Louisiana. You want odds? Check out the probabilities table provided via Dr. Bob Sheets and Jack Williams in Hurricane Watch: Forecasting the Deadliest Storms on Earth.

Interested in a tool for viewing and evaluating hurricane tracks? Try the NHC archive of hurricane seasons.

Finally, consider that unlike most financial storms, the duration of the disruption caused by a hurricane strike is fairly easy to predict, which makes mean reversion plays all the more attractive. This is something to think about, anyway, as Dean whips up fears that will likely be out of proportion to the probabilities times the magnitudes of the various possible scenarios.