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Showing posts from March, 2017

The Surreal Nature of Volatility

Even a lot of people who care nothing about art would recognize “The Persistence of Memory” by Salvador Dali. It is the tiny surrealist gem with the melting watches. It is an undoubted masterpiece and shows how great Dali was before he decided being a celebrity was easier, but that isn’t directly relevant here.
Volatility also shows persistence of memory. That is the basis of the GARCH family of models. In the short term volatility persists. And right now volatility is low. On March 30th, 2017 the VIX closed at 11.54. To put that in context, this is in the lowest 6th percentile since the VIX was first calculated at the start of 1990.
Based on this number it might seem like a good time to buy volatility, either through options or VIX futures. There are two problems with this idea.
The first is carry. If you buy VIX futures you pay the basis. As of the 30th of March, the April futures are 1.26 points above the cash index. This means that if the VIX stays where it is and you are long …