Oct

19

 In the context of markets, a cost is a reduction in equity or a forgone opportunity of enhancing equity. A decision, in the context of markets, is a new trade. A rise in the price of volatility is, in general, accompanied by a fall in the price of the underlying and vice versa.

A rise in the price of volatility is a reflections of the higher cost of protection market participants are willing to pay for their indecisiveness.

Hence, volatility is the cost of unwillingness to decide. Should one then, being a contrarian, not be keen to take a larger number of decisions during periods of higher volatility? How may one be able to study and understand if volatility is the cost of decisions or the cost of not making the decisions?

Matt Johnson comments:

Volatility is an expression of uncertainty (risk), not an ‘unwillingness to decide.’ For me, an unwillingness to decide is the lack of a clear trading plan. I make most of my money in periods of higher vol, but I’m in at the beginning, when I’m most uncertain — not at the end.


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