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Volatility is the antithesis of liquidity...


Editor's Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Prof. Succo -

Given what you do, I assume you have on paper, or at least in your mind, some sort of probability matrix in which you detail the likelihood of certain scenarios. With vols as low as they are, it would seem they have nowhere to go but up. And yet, they've been at these levels for some time now. I know from your writings that you are of the opinion that we won't stay at these levels for long (unless I've misread you). What could keep volatility at these low levels, no matter how remote the possibility? What 5 things can you foresee that would push them higher? What are the probabilities of those 5 events occurring within 3 months? 6 months? 1 year? Are those 5 events mutually exclusive? Will one event lead another, and another, and so on and so on?

What are the repercussions for you if you're the one who is wrong? (I'm not saying you are, I'm just trying to educate myself.)

Thanks for your time,

Minyan KM


We look at volatility and its implications to option prices in many ways. But we don't have any idea how to predict the general level of volatility. We have ideas as to what causes it to increase and decrease, however.

I look at volatility as the antithesis of liquidity: in general, the more liquid something is, the less volatile. So as central banks over the last several years have produced an unprecedented amount of liquidity, market volatility, especially in stocks, has dropped. An attempt to drain all that liquidity, I believe, would be a cause for increased overall market volatility.

We concentrate much more on stock volatility relative to index volatility and make our bets there. We do have opinions on stock prices, but as I have mentioned, we don't use those opinions to make bets on direction, but on the volatility of the stock relative to other stocks and indexes.

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