Quote of the Day: Volatility

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“There’s a saying on the options floor, that you buy low volatility and sell high volatility, but when it gets very high, you buy it,” he says. “High volatility, you sell, but extremely high volatility is telling you something, and markets tend not to price in that kind of move.”

-Steven Gross, a principal at Penso Capital Markets LLC

Excellent observation. . . 

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Source:
Making A Bundle Shorting Financials
David Gaffen
WSJ, March 17, 2008, 11:52 am
http://blogs.wsj.com/marketbeat/2008/03/17/making-a-bundle-shorting-financials/

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What's been said:

Discussions found on the web:
  1. American ZIRP commented on Mar 19

    Can anyone explain this a little more? I am not completely sure I have benefited from this post.

  2. Marcus Aurelius commented on Mar 19

    Translation: We’re off the charts, and we don’t have the slightest clue what will happen next. Every man for himself.

  3. dukeb commented on Mar 19

    Marcus nailed it for every actionable penny it’s worth.

  4. jake commented on Mar 19

    3 month t-bills down to .61….this is scary

  5. American ZIRP commented on Mar 19

    Oh, thanks! :)

    Everyone and their mother was telling me everything was fine yesterday while I have been watching the TED spread rocket to 2.

    Is there a rumor I am supposed to know about? Where the hell is Gasparino when you need him.

  6. Leawoodblues commented on Mar 19

    Gasparino is busy trying to come up with some new bullshit to spew on CNBC in hopes of somehow remaining relevant.

  7. Mikkel commented on Mar 19

    Or for the math fans:

    When you get 2 standard deviations out expect a reversion to the mean.

    When you get 3 standard deviations out throw away your models because the feedback loops are going to override them.

  8. The Financial Philosopher commented on Mar 19

    I prefer to “sit still amidst chaos” but I am not a trader…

    Your quote of the day does provoke thought, though…

  9. David commented on Mar 19

    During the last bear market, the VIX got up to 45 (on 8/5/02). This bear probably won’t end until the VIX has gotten above 40 at least a few times.

  10. karen commented on Mar 19

    Rumors I’ve read on line today:

    MER has a big write down coming.

    LEH really is in trouble.

  11. maximo commented on Mar 19

    One honest question: Do experts really believe the dollar will recover this year? And is it really tied to oil like some TV pundits say it is?

    Thanks,

    Maximo

  12. American ZIRP commented on Mar 19

    LEH can’t be in trouble the CFO went on CNBC yesterday and said so…oh, wait, I guess that means it will be a $3 stock by Monday.

    I liked how LEH and GS said they were just “testing” the discount window.

  13. Roman commented on Mar 19

    Another question of the day:

    Are we seeing a commodity correction or will the commodities join the equities in the bear market?

    And if they do join the equities, then will the deflationary pressure they provide overwrite the inflationary pressure Bernake’s loose monetary policy will bring?

  14. Winston Munn commented on Mar 19

    Karen,

    Your post reminds me of the movie, “And Justic for All”.

    “Arthur Kirkland: You’re out of order! You’re out of order! The whole trial is out of order! They’re out of order! That man, that sick, crazy, depraved man, raped and beat that woman there, and he’d like to do it again! It’s just a show! It’s a show! It’s ‘Let’s Make A Deal’!”

  15. karen commented on Mar 19

    Maybe I should watch that movie again…

    What I read was that LEH had $87 billion in troubled mtg related “assets.”

    I’m just about done shorting this market on every blast off, though. It’s become unnerving, and I don’t want my hair going gray.

  16. lurker commented on Mar 19

    For English majors:
    “The markets can remain irrational longer than you can remain solvent.”

  17. Donkei commented on Mar 19

    If bull markets climb a wall of worry, this bear market is a roller-coaster ride of manic depression.

    I sure hope that bar across my lap doesn’t give.

  18. Just D’ZIRPs commented on Mar 19

    “High volatility, you sell, but extremely high volatility is telling you something, and markets tend not to price in that kind of move.”

    We’re being told “something” that markets don’t price in?

    Why does this indicate a buy?

  19. Short Man commented on Mar 19

    Check out the April option chains on LEH. Over 20,000 April 40’s and 25,000 April 25’s traded today at what looks to be the ask side. Someone is damn sure LEH is going to implode and the Fed has already demonstrated it will preserve the system but not the common shareholders.

    I love this volatility. I’ve made far more money in the past 3 months than I did the first 3 years of my career. Just play it as a two way market and take profits as they come and reload when the bottom catchers get in on the action.

  20. TempusFugit commented on Mar 19

    “sell high volatility, but when it gets very high, you buy it”

    True for options on individual equities but not true for index options. That is, it’s true for options on stocks that are about to blow up, but can’t be true for index options unless you believe the whole economy is going to blow up. And by “blow up” I don’t mean “bear market” I mean the end of civilization as we know it.

  21. turf war commented on Mar 19

    Curiously vol can “tend” to be cheap when its high and expensive when its low – no-one wants to pay hi vol as it seems unsustainable and low vol gets puked after the market has been dull. Not exactly a golden rule but holds well in markets such as these if you pay up and get lucky with the turns.

  22. Winston Munn commented on Mar 19

    Is this extremely high volatility or simply instability?

  23. DesiPanchi commented on Mar 19

    I don’t know how well financial markets compare with physical systems – to me it seems as if all these gyrations – to the extent that they are getting crazier and crazier (again I don’t know if someone has some objective way of determining this) implies a system heading towards out of control ie., a systemic meltdown could be coming. Now, that could be seen as the ultimate contrary indicator – as in this IS the end of the world as we know it.

    Maybe this IS the end and a new beginning is coming :)

    My head hurts…

  24. bh commented on Mar 19

    any of you bother to look at the treasury market ever? the 30 yr was only up 2 pts today, people are puking out their steepener trades, Meriwether and a couple other fixed income relative value funds have given back their last 3 yrs of profits in the first 3 months of 2008………….

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