How Is Volatility Like the Weather?

• Posted by Adam Warner
• on October 2nd, 2009

So, I step outside yesterday and it’s absolutely freezing. Or so it felt. Yes it’s cloudy, but it’s 55 degrees out. If it was 55 and cloudy in January, we’d all be out in shorts, but since it’s October, I’m wearing a fleece sweatshirt.

It’s somewhat simiar to what happened to volatility yesterday. If we had a 2% drop last October, we’d yawn. CNBC would crow about how much worse the day could have been given the news flow. The low reading of 10 Day HV last October was in the 50′s, the high was in the 100′s.

In October 2009, we’re used to the SPX moving at about a 15 volatility clip. If yesterday becomes typical, it implies volatility of twice that. So hence a bit of shock and panic and rather large 10% pop in the VIX. It’s the investing world reaching for that fleece sweatshirt en masse. A trader beamed here directly from October 2008 would laugh at us.

While it’s understandable to reach for options on a day that in this environment feels like a waterfall, it’s also on the bullish side. This is Complacency morphing into Fear in a 2-day time span. The VIX closed 15% above it’s 10 day SMA, that’s a pretty large extension. In 2008, the VIX just stayed permanently overbought by this metric, so will watch with interest to see how we react.

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