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The Volatility of Volatility Brings Out the Bear


And it's very tough for a train to change directions on expiration week.

Bill Luby pondered him some volatility on Thursday.

"Just a few weeks ago it was widely believed that all the banks were insolvent, the economy wasn't going to turn around until 2010 and, if we were lucky, the housing market might bottom before the end of the year.

"A flicker of hope here and a flicker of hope there and now suddenly some of the worst case scenarios are being discarded. Perhaps it is just a case of the slowing pace of economic deterioration, but there's always the possibility that things have already started to turn up. ...But are the celebrations premature?

Volatility is notoriously difficult to predict, but my personal forecast is for the recent decline in volatility to drop to no lower than the 30-32 level before flattening out."

Sounds like a reasonable call; I'd go with that myself. And at this point, we're almost there.

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I'm not exactly bearish, per se. My thoughts on volatility now are independent of my thoughts on the market. I just think this will all take more time. It took a while for the market to get reacclimated to a 40 volatility world; no reason not to expect the same thing on 30 volatility.

By the same token, I don't think we'll go back to 50 VIX anytime soon, either - even in market plowage. It just has a bit of a been-there, done-that, how-much-can-you-hurt-me-know feel.

So I guess as I write this, I'm bearish on the volatility of volatility, so I should probably sell VIX strangles. I'll look into it.

As for the market, it's very tough for a train to change directions on expiration week. But that's behind us now.
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