Volatility is a measure of speed; how quickly prices spread out

Volatility is a measure of speed.

As options traders, we are sensitive to the velocity of a price trend.

If the market doesn’t trend with enough momentum, an options contract may have less value.

Volatility is also a measure of how quickly and wide prices spread out.

For example, the bell curve shows three possible distributions around the current price of an option.

Source: Natenberg, Sheldon. Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition . McGraw-Hill Education.

If we are researching the value of the call option, it will depend on the amount of the distribution to the right of the exercise price. As it shifts from low-volatility, to moderate-volatility, to high-volatility, more of the price distribution is on the right side, and the option price trends up to an increasingly greater value. I highlighted in green the area where the higher volatility level results in a higher call option price.

Markets move fast in a volatility expansion, and VIX the continues to imply greater than average speed.

So, we should expect to see a continued higher range of prices, and faster moves up and down.

The three widely followed stock indexes closed slightly down for the week after peaking on Wednesday.

We’ll soon see if this is the beginning of an inflection point as many expect to see a lower low, or at least a retest of the March 2020 low.

If this is a prolonged bear market to go along with recession, as it may well be, I expect we’ll experience many swings up and down along the way. As I successfully traded tactically through the 2008 to 2009 period, many investment managers I know who didn’t do so well had trouble with the swings and whipsaws.

To actively manage risk, and capitalize on trends in bear markets requires flexibility and nimbleness. It also requires shortening the time frames. As the implied volatility remains very elevated at 37, investors should prepare to see these swings until volatility contracts again.

We know many investors are afraid of more losses in their portfolios if they hold stocks or funds they otherwise want to keep, rather than sell. We are making my ASYMMETRY® Portfolio Hedging program available as an advisory service for accredited investors with an investment portfolio of $1 million or more. To see if your portfolio qualifies, contact us here.

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Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

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