Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Complacency or Reality?

By

PrintPRINT

Sept. 11, 2001 caused an explosion in volatility as investors tried to discern what reality was to look like going forward. Systematic risk completely dwarfed unsystematic risk as investors forgot about individual company fundamentals and focused on world events.

In August 2001, at-the-money 50-day implied volatility (relative option prices) stood around 17% (implying a 17% move up or down in the index). For the next 18 months, implied volatility reached levels as high as 35% and probably averaged 25%. Today they stand again at 17%.

These facts beg the question, is risk in the stock market the same as it was before Sept. 11, 2001? Perhaps it is or perhaps the market is looking in the wrong places.

As I wrote about in my piece, High Volatility, rightly or wrongly, I believe that there is a high correlation between debt and volatility. I am not a buyer of volatility (long options, long gamma) because I am worried about terrorism. I am a buyer of volatility because the government is conducting monetary and fiscal policy at levels that warrant the term "experimental." I am a buyer of volatility because over the last few years this nation has created debt (through excess liquidity) at all levels (public, corporate, and household) at an unprecedented rate (total U.S. debt now stands at 300% of GDP). In buying volatility/gamma I have been targeting companies with very high leverage. This is not a statement of whether these stocks will go up or down in price, just one on how fast and how far they will go.

Most market participants have been persuaded that debt should not be an impediment to consumption nor does it present unmanageable risk. I do believe that debt is at levels where it is acting like an anchor: no matter how high the water rises (liquidity), the anchor won't let the ship sail. So reading between the lines I am bearish, but I learned a long time ago not to make my major bet on market direction. I am making my major bet that implied volatilities are too low, that stocks will move more (and that there is more risk) than the options are charging us for.


No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE