Chart of the Week: Volatility Index

Back in January 2006, I suggested that the period of long placidness in markets were coming to an end, and that it was a good trade to Buy Volatility.

That turned out to be an even better trade than I hoped/feared: Here’s a nice looking graph from the National Post, showing the records highs in the VIX:


Market Volatility Reaches Depression-Era Levels.


Sources: Bloomberg News, Andrew Barr, National Post


"Market uncertainty has caused the S&P 500 index to swing at least 1% in either direction on 53% of all trading days this year. That makes the current period of investing the fourth-most volatile period ever, and pushes it past 2002 levels to be the most volatile since 1938, during the Depression era. [T]here was a good chance the current market will break the 1938 record, when the index rose or fell by at least 1% on 57% of trading days over the equivalent period . . .

The better equity market performance caused the Chicago Board Options Exchange Volatility Index, a key measure of future market volatility, to fall 0.89 points yesterday, or 3.3%, to 25.73. Over the past year, the index has traded at a low of 11.46 and a high of 37.57.

"We’re in a period where nobody quite knows if there’s another Bear Stearns out there, and as long as that kind of environment is pervasive, I think you’ll continually to see these big upside and downside days," he said, adding his firm increased its cash investment position last summer to avoid the wild equity market swings. Mr. Bjorgen said even professionals were unsure where to put their money or how long the volatility will last.

Good stuff . . .


Volatility highest in 60 years Likely To Continue
Alia McMullen
Financial Post  Tuesday, March 25, 2008

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Marcus Aurelius commented on Mar 27

    “We’re in a period where nobody quite knows if there’s another Bear Stearns out there…”


    Au contraire – we do know there’s another BSC waiting in the wings. In fact, I can say with relative certainty that there will be several. The question is who can keep their losses under cover the longest.

  2. Keefer commented on Mar 27

    Useful chart. It would be safe to say, however, that it would be very expensive to go long volatility from here, correct?

  3. Joe commented on Mar 27


    How does one buy volatility? Do you just mean the vix? Or does that just mean be a trader?

  4. Pool Shark commented on Mar 27


    Right you are, but we don’t yet know who it will be (Lehman)

  5. JP commented on Mar 27

    “Market uncertainty has caused the S&P 500 index to swing at least 1% in either direction on 53% of all trading days this year. That makes the current period of investing the fourth-most volatile period ever, and pushes it past 2002 levels to be the most volatile since 1938, during the Depression era.

    Since the S&P doesn’t go back to 1938, how is this accurate?

  6. Vermont Trader commented on Mar 27

    Joe – you can buy calls on the VIX.

    Of course, the calls are priced based on the expected volatility of volatility. So you have to feel that volatility will be more volatile than the call sellers.

    Not a Buffet type investment to be sure.

  7. Mikkel commented on Mar 27

    “The S&P 500 index was created in 1957, but it has been extrapolated back in time. The first S&P index was introduced in 1923. Prior to 1957, the primary S&P stock market index consisted of 90 companies, known as the “S&P 90″, and was published on a daily basis. A broader index of 423 companies was also published weekly. On March 4, 1957, a broad, real-time stock market index, the S&P 500 was introduced. This introduction was made possible by advancements in the computer industry which allowed the index to be calculated and disseminated in real time.”

  8. michael schumacher commented on Mar 27

    Premiums on almost all financial puts are a joke.

    They have priced in a large move down already…….

    If you do not have them already you are paying such high premiums so that the put writers can sucker in more call buyers.

    Check out MS Jan 09′ Puts. The premiums attached to that have already priced in a 50% haircut…..



  9. michael schumacher commented on Mar 27

    Fed’s Lockhart:

    Recovery may be delayed until 2009

    Someone push the “moonshot” button……..

    Bad is good…..


  10. Wall Street Crooks commented on Mar 27

    Surprise, surprise…

    Are you really surprised that we are at those levels Barry? Hmm…

    We had the same volatility during depression era, before no shorting on down tick rule was adopted.

    This rule was abandoned by the corrupted SEC last summer. Wall Street crooks and exchanges have been lobbing (bribing} the SEC for years to abandon this rule because they make more money in a high volatility environment.

  11. Nihilism commented on Mar 27

    Market Volatility Reaches Depression-Era Levels…and yet, forward PEs are above 15 on SPX! And, we haven’t officially entered a bear market. Brave new bailout world or all priced in? Or F/GSM – fed/government sponsored free-markets!

    ORCL is not the whole economy. We will mark it down but we can’t mark the whole market down ahead of Q-end. We have one mark up in Dec, before the jan sell-off and then bounce up for hedge funds month-end at the end of Jan, before the feb sell off. And now we awant to make sure we get a monthly close above 1330 (FEb) close. We have general Benny selling puts on XLF probably.

  12. Marty commented on Mar 27


    Glad you are taking time off from TV. Business journalism is a joke as we all know. No sense helping prop up those clowns.

    Have you seen Fox’s Happy Hour? It should be called “Boobs and Business”. If you ever show up there it’s all over.

    Love your blog- raise your advertising rates.


  13. craig commented on Mar 27


    I haven’t yet seen the Fox Happy Hour Show….but after your description, I’ll BE SURE TO TUNE IN!!! T&A reporting on M&A….sweet.

    As far as volatility goes, a market whip-sawing plus or minus 1-2% on a regular basis probably isn’t healthy and capable of making sustainable long-term gains based on sound fundamentals. seems a reasonable assumption there may be a lot of sound and fury on a daily basis but not much progress (up or down) for a pretty long time (until the excesses of the bubble are purged and pretty fully known).

  14. Karl K commented on Mar 27

    I’ve been investing — or I should say speculating –in the options markets on and off for the last 10 years.

    Never have I see so many opportunities out there as I see today. Implied vols have never been so nuts. Put/Call parity is from time to time non-existent. Earnings disappointments and surprises will be punished/rewarded in spectacular ways over the next couple of quarters.

    Meanwhile classic hedged credit spread positions can be very juicy — but very risky, even on high probability winners. So you have to have the stomach to take your losses on some positions right away and abandon hope. But another opportunity is right there to grab.

    In addition to the fear of credit market meltdowns that are driving option market volatility, two other things are operative in today’s options markets.

    –Highly leveragable short/long positions can be structured quickly. As a result you see some investors “doubling down” on their actual short stock positions with various synthetic structures and can in turn cover their both their synthetic AND actual short positions with opposite synthetic positions. Result? Huge price moves, even on out of the money options.

    –Market makers are freaked. Bid ask spreads are huge even in very liquid contracts. Mid-mark limit orders that in the past would get filled relatively quickly can sit there like a lump.

    As for the VIX, well, trust me: as an “investment” vehicle, you do not want to try that one at home. However, deep out of the money calls and puts in the VIX can be very good hedges on both options and stock positions.

  15. kk commented on Mar 27

    1938 was a very good year for stocks.

    DJIA 1938 +27.7%

    December 31, 1937 120.85
    December 30, 1938 154.36

  16. blin commented on Mar 28

    Market Volatility Reaches Depression-Era Levels.


    Well strangely enough, volatility has not even surpassed the levels seen just 6 years ago.

    Take a look at the old VXO ticker (still my fav) We would have stay these levels for another half year just to be on par with ’02.

    Also notice, the VXO spiked almost 50% higher in ’02 than this years high.

  17. Don commented on Mar 28

    Barry Ritholz pulls a Cramer!

    Glad you have the links Barry. Here’s EXACTLY what you actually said. “This could be the year that Volatility returns to the market. Buying VIX calls is one of my favorite positions for 2006.”

    Buying options, whether it was VIX calls or index straddles was a disaster in 2006. In fact, buying any volatility in 2006 was a disaster. If you bought VIX calls, as you advocated in your January 2006 post, you got hammered. If you bought them in-the-money, or out-of-the-money, you got crushed. You had one good month–April expiration to May expiration–and that’s it. And if you bought S&P straddles instead of VIX calls in 2006, you got crushed. And I mean slaughtered crushed.

    And it wasn’t any better in 2007. Because those VIX calls are based on the futures, not the index. And the futures have usually carried a significant premium because it’s hard to arb the premium away, so you were buying inflated time value on an inflated futures contract.

    To see if the staggering losses from your advocated strategy was due to choosing the wrong product to trade (VIX options on VIX futures), I looked to see what would have happened if you bought straddles on the index itself, because that didn’t have the futures premium built into it.

    You would have made big money with the March 2007 expiration and August 2007 expiration. For instance, the August SPX straddle at July expiration cost 55. The index fell 90, so you made 35. But, as race driver MS noted, after those plunges, the option prices adjusted such that buying volatility would have made an investment in Bear Stearns look good. For instance, at the August expiration, the at the money September straddle cost 96.70. The S&P had a huge 80 point move up. You lost about 17 that month. And the following month, the October straddle cost 68. At expiration it was worth 25. You lost a whopping 43. After that, it only got worse till December/January. But that doesn’t compare to the 55 point beating you took from January to February.

    Now here is what you claim: “That turned out to be an even better trade than I hoped/feared”

    Are you kidding me? Buying volatility in since you made that prediction was a worse investment than ABK or BSC.

    My bet is that you’ll justify the bad call by saying something like, “I meant that the volatility would pick up in certain sectors like the financials, or the ags.” Good, you’ll then sound like Cramer and his infamous Bear Stearns call.

    I expected better of you Barry.


    BR: I don’t know about you, but we made money on the VIX call . . .

  18. DavidB commented on Mar 29

    How does one buy volatility?

    Posted by: Joe | Mar 27, 2008 12:04:57 PM

    I like to sell volatility myself Joe. Writing short term covered calls on a portion of my more volatile shares allows for the capture of that premium along with some benefit if the stock takes off.

    Watch your downside though. Usually volatility is indicative of stock uncertainty and traders don’t put their money on the line for no reason.

    It also could mean a fund with big money in the stock is suffering and unwinding and that is where your profit potential comes in because the fundamentals of the company are still sound. They are just trying to cram an elephant through the front door of the stock price.

Read this next.

Posted Under