Volatility Here to Stay?

Hey, if you like your volatility for the longer term, and you think it’s about 1930 right now on the Crash Clock, you may be in luck. MarketSci Blog looks at some charts, and sees this (hat tip Abnormal).

A few non-surprises here. (1) Volatility from 2004 through most of 2007 was close to historical lows. (2) Current volatility is at levels only seen a few times in market’s history: the late 1920’s, various points in the 1930’s, and 1987. And (3) the market exceeds two standard deviations far more often than it would if it followed a random walk (an assumption of modern finance that is fatally flawed).

The reason that this chart caught my eye was how sustained volatility was in 1920’s and 30’s. We went years and years experiencing the kind of gut wrenching gyrations we’re seeing now. I know it’s dangerous to compare this market to that one, but if we allow history to be our guide here, this ride could be a long way from being over.

But here’s something modestly counterintuitive amid the options volatility boom. Volume has declined, as per WSJ’s Marketbeat.

Trading in options has been declining as a result of the high volatility. For the month of November through Tuesday, about 11.4 million contracts changed hands daily, compared with the 2008 average through Tuesday of 14.6 million contracts, according to the Options Clearing Corp.

Alhough maybe it makes sense. Higher volatility means higher prices for everything, and fewer contracts needed to cover a specific bet or play.