Oct

19

Volatility: Cost of (In)decision? from Sushil Kedia

October 19, 2008 |

6 Comments so far

1. George Parkanyi on October 19, 2008 8:12 pm

   I’m not sure I would categorize volatility as a measure of indecision. I see a lot of decisions being made lately - the bulk of them being to flee in terror.

   But by your measure I must be a contrarian, because I haven’t changed my system, and where before September my signaled trades averaged about 9-12 a month, in October it’s already 37, and counting. (This wasn’t supposed to end up as day-trading.)

   Speaking of fleeing, one talking head on Bloomberg did provide a good laugh the other day. He made the case that stocks are bargains thus: “You don’t see people running away screaming when a store puts on a 50% sale.” That was actually quite a funny visual.

   Cheers,
   George

2. the boy on October 20, 2008 7:49 am

   The problem here is not only the cost of volatility rising… as you could certainly sell vol if you wanted to be contrarian, but also the bid/ask spread has risen. There would seem to be no doubt that with everyone fleeing for cash of late, the trade is to go into "not cash" but as with all contrarian plays, it becomes a question of timing and a leverage function. Go it just a bit too early and with too much leverage, and it won't take long for the market to wipe you out of what would most likely be a great position just a bit later and with less leverage.

3. Andrew McCauley on October 20, 2008 10:37 pm

   Volatility itself can be a decision: Long or Short Volatility.

4. steve on October 22, 2008 10:08 am

   The worst thing about the volatility that the markets are experiencing is the way it takes all of the oxygen out of the room. Monday up 400 Tuesday down 300 Wednesday down 300 by 10:30

   This is insanity on any level.

   I heard a commentator state that the markets never caused a recession. Well this volatility has instilled a fear in the public that I have never seen before. The public genuinely fears that they will have no money to live off of.

   I was speaking to a minister in a Baptist Church and the members of the choir were discussing who they might vote for. Some said they were voting Obama. He asked them but what about his stance on abortion and other liberal issues. Their comment was they were much more concerned about the economy than any moral issues at stake.

5. Stephen Knipe on October 23, 2008 7:05 am

   I disagree. If people were totally indecisive and no trading decisions were made then volatility would equal 0.

   Your argument mixes too views of decisiveness. The first is decisiveness about the price that the market should be at i.e. market price uncertainty - the second is the 'decisiveness to trade' which is a different concept - and in fact correlates to volume, not volatility. The two are not the same thing.

   Relating the two then only holds if high volatility logically implies low volume - which is not the case. For example if someone is uncertain about the market price, but they are long in the market, it might motivate them to sell.

   Also being a contrarian relates to being a seller when someone else is a buyer and vice versa. Being a 'volume contrarian' — only trading small when others trade large or a market price decisiveness contrarian — being more decisive about price (how?) when others are indecisive about price doesn't make any sense.

   Of course you can be a volatility contrarian buying and selling volatility directly but that is another subject entirely.

6. the boy on October 23, 2008 7:51 am

   Imagine that, Steve!