Oct

23

sushilAndrew McCauley says, "Volatility itself can be a decision: Long or short volatility."

That is stretching the point which then can be elucidated by the fact that the cost of (in)decision question would then address the volatility of volatility as the relevant metric.

Stephen Knipe says, "If people were totally indecisive and no trading decisions were made then volatility would equal 0."

Well that's one specific situation in which volatility could be zero. The other situations could be where there is a linear or otherwise perfectly predictable price curve. Could it not be said that since there is uncertainty and / or volatility people trade and not vice versa? In the absence of any trading activity the reading of volatility will keep dropping closer and closer to zero.

Perhaps my own original question suffers from the limitations of language at expressing. I may be able to convey my query better hopefully by paraphrasing that should one lean onto trading strategies / practises / ideas/ habits/ programs whatever anyone follows that tend to increase the frequency of trading as the PRICE of volatility goes up?

We have discussed this before on the lists and I have written that the price of volatility is what is observed in the markets whereas the value of volatility is unique and different for each unique participant in the same was that the price of the underlying security is same for everyone but the value of the underlying is different for each unique participant.

There is a another possible way to visualize the response mechanism of each participant as to what is volatile and what is not volatile that when a price series spends more time within the boundaries of moves around the mean change over the relevant (for each participant) time span that trigger the sense of pain and gain for each participant it gets increasingly volatile. The less time a security price series spends within the pain and gain definition bounds of a trader / trading system the more number of profitable or loss making trades it generates. I conclude that as each individual's value assessment of volatility increases each individual is induced to trade more. Another twist exists that the law of diminishing marginal utility might not be ruled out here. As the individual sense of volatility goes past a certain optimal threshold for each the desired frequency of trading does come down. In such a context, when the commonly accepted and agreed upon price (not value) of volatility is going up (option implied volatilities or the vix index) the actual prices of the security are jumping around the mean path more widely triggering crossovers of pain and gain thresh-holds with a larger frequency. However the paradox then arises that options writers (volatility sellers) are providing to the options buyers (getting more uncertain about market in the coming future) a protection from the perils (expected by the option buyers) of taking decisions. By such an argument is it then not true that at any given point in time the buyers of options or protection are those whose optimal point for increasing the number of decisions with rising volatility has already been reached while the writers of options have an optimal point on the volatility vs trading frequency curve further ahead?

Volume, I would like to submit to Mr. Knipe, according to me is the struggle for the discovery of price. Volume itself can be erratic or steadily rising or falling. Perhaps, akin to the kind of insight the volatility of volatility could provide about the state of markets the volatility of volume may aide in understanding the market's willingness in contesting or not contesting the discovery of price. Volume I do not agree is the "decisiveness to trade" but it perhaps is the anti-thesis of the prevailing price meme in that a rising volume provides a rising chance / facility to trade rather than a rising willingness to trade.

If the volatility-frequency of trading relationship can be tested to the applicability of the law of diminishing marginal returns of volatility in inducing trading then it may be possible to demonstrate that strategies that are pegged on buying large packets of insurance with an aim to living under long periods of non-achievement to gain some day on the unpredictability of dooming uncertainty arising at some point are rather than getting fooled aiming to fool the rest on the concept of randomness.


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