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Repercussions

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Volatility is the antithesis of liquidity...

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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


MKM -

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.

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.

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