Monday, July 13, 2009

Quantifiable Edges and Daily Options Report on Volatility

I woke up this morning to find two posts on volatility from fellow East Coast bloggers who have some excellent insights on the subject.

Rob Hanna at Quantifiable Edges has a post up in which he looks at short-term volatility cycles. In What Happens After a Sharp Contraction in Volatility, Rob reviews three day periods of extremely low realized volatility and concludes that three day cycles of extremely low volatility are typically followed by three subsequent days of dramatically increasing volatility, in classic mean reversion fashion.

Adam Warner at Daily Options Report covers several volatility-related issues in Other VIX Gappage, where he discusses gaps in the VIX and his preference for using VXX over VIX to better gauge volatility trends on Fridays.

Both bloggers make superb points about volatility and both are on my daily required reading list for their consistent high quality work across a wide variety of subjects.


Graham Critchley said...

Bill, I see that VIX:VXV hit 0.866 when the SPX hit 895

Starting tro look like Dec 07, May 08 & Aug 08.


Bill Luby said...

Indeed, Graham. The current VIX:VXV level is comparable to that of Aug '08 and falls short of only Dec '07 and May '08.

All three of these previous instances preceded a fairly strong bearish move. While my bearish bias is waning right now, this ratio definitely has me thinking cautiously about the long side.



Anonymous said...

Anybody got a handle on why Whitney would reverse her stance so suddenly? Seems kind of rash.

Anonymous said...

Bill, I thnk it's good that you're dropping your bearish bias. You clung to it for months while the market never really affirmed the degree of your bearishness.

It appears that your shift in content, away from directional vix and market calls, and instead toward the mechanics of options, is a tacit white flag being raised by you from the bearish camp.

Another option for you: When you don't seem to have a confident handle on direction, just go the other way.

Bill Luby said...

Good points about bearishness, anon.

For the record, my newsletter shows that I was bullish from late February to June 21st. I was really only strongly bearish through last Friday and flipped to bullish yesterday.

Also, as someone who is predominantly a short-term trader, my typical 3-10 day time horizon is not consistent with longer-term market calls, but I do make those from time to time, as much for entertainment value as anything else.

On a related note, the largest portion of my trades are volatility-based and often non-directional. I try to do my best not to talk about these trades here (I detest the 'trading journal' approach to blogging) and am frankly much happier talking in general terms about options, market sentiment, ETFs and related subjects.

As for the white flag of surrender, it is probably a trader's best friend and one that is certainly underutilized by many (perhaps an idea for a future post...)

Cheers and good trading,


Anonymous said...

Cheers to you too. You put up a great site, btw.

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