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Inside Volatility Trading: Nothing Remains Unchanged

Cboe

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In my experience, travel (music, literature, etc.) is all about perspective. I am a “flatlander” who just visited Montana/Wyoming with my family and life-long friends. Departing Chicago and finding yourself in the northern Rockies inherently forces a perspective shift. We spent time in Yellowstone National Park and discussed John Muir, Lewis and Clark, and other early Western explorers. It’s awe inspiring to observe how quickly the natural landscape moves from rolling plains to 14,000-foot peaks in the Grand Tetons.

Reflexively, I come back to the broad concept of volatility. Volatility is embedded in the natural order. Nothing remains unchanged. Everything is in a constant state of flux. Relative peaks and valleys. For every buyer there is a seller. There are bull and bear markets, up and down days, weeks, or months. There is chaos that gives rise to opportunity. Knowns and unknowns.

Here’s a look at the monthly average (closing levels) for the Cboe Volatility Index® (VIX® Index) going back to January 2020. Clearly, average monthly volatility levels as measured by the VIX Index have been normalizing alongside the global economy. The July average calculation is subject to change, but if it holds (or moves lower) it will be the lowest average monthly VIX measurement since January of last year.

VIX Index Monthly Average

Source: Cboe Global Markets/Options Institute

Randomness is when a human being can no longer compute all the factors. – Firas Zahabi

Humans strive for understanding. We crave certainty, but the “natural order” breeds uncertainty. Humans developed tools to help mitigate relative levels of uncertainty (think: agricultural, industrial, and ongoing technical revolutions/tools). Derivatives, which date back millennia, have always been tools for risk management. Options can be used to define the potential range of outcomes for a specific time frame. They help facilitate the inherent desire for determinism.

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Originally Posted on July 27, 2021 – Inside Volatility Trading: Nothing Remains Unchanged

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