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Volatility Is Down, but Still Dangerous


Maybe someday we'll look back and laugh, or maybe not.

As the one-year anniversary of the Lehman Brothers bankruptcy rolls around, I can imagine there will be very few celebratory parties.

I certainly have no desire to celebrate what turned out to be my second experience jumping out of an airplane, but I do want to make sure that some of the volatility data from that period are captured here for posterity.

At some point in the future, some of us will want to look back and see just how crazy things got during the historic volatility of October and November.

With this idea in mind, I've chosen to make this week's piece a reflection of the current implied volatility vs. the 52-week high IV of the 30 companies that comprise the Dow Jones Industrial Average.

Of course, the DJIA consists of some of the most financially sound companies in the world. Therefore, this exercise should highlight companies that have experienced a less severe impact from the financial crisis -- compared to some of their more speculative peers.

Click to enlarge

In fact, the numbers show that peak implied volatility for these blue chips was, on average, about 3.2 times higher than it is now. Even now, some of these numbers boggle the mind and make a VIX of 89.53 look almost pedestrian in comparison.

Note that Citigroup (C) and AIG (AIG) were part of the DJIA when Lehman Brothers went bankrupt and subsequently had their membership from that select club revoked.

For comparison purposes, consider that Citigroup's implied volatility peaked at over 328 and currently sits at 66. AIG, on the other hand, saw its implied volatility spike all the way up to 540. It has since fallen to a more benign, but considerably elevated 135. Progress? Perhaps…
No positions in stocks mentioned.

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