This week has been one for the record books…if you are a volatility trading nerd like the three of us, it was also a very active, and sleepless week. As we tell our clients, this is what you pay us for – we stay awake so you can sleep.
One feature of volatility spikes that we have observed is they are getting more intense but at the same time shorter in duration. Observing the spikes and then decay in volatility since the dot-com bust, we can paint the following picture: during the dot-com bust vol spikes would take years to abate; then during the 2008-2010 crisis the spikes would take quarters to abate; during the next decade which would culminate with the “Volmageddon” episode of 2018, it seemed that volatility spikes abated over months; during the COVID period, spikes would abate over a few weeks; finally the vol spike of the past week abated within a day, maybe less if you include after-hours trading. We understand that these are gross generalizations, but being in the trenches we cannot help but notice that the reaction time needed is getting shorter and shorter. Blame it on algos, high-speed traders, networks, social media, or any other such sources that are based on speed, but the fact of the matter is that if you are managing tail risk portfolios or long volatility portfolios in general, the amount of time we have to capture the increase in value of the options is being compressed.
The full note on this important topic can be downloaded at this link: LTA Thinking – Monetizing Volatility Spikes