How To Play A Volatility Spike

Yesterday, I was pleased to once again have an opportunity to pen a guest column for Barron’s, pinch hitting for Steve Sears in his The Striking Price column with How to Play a Volatility Spike. If my math is correct, this is the nineteenth time I have been a guest columnist in this fashion. I always try to keep my subject matter linked to current events, but the irony is that when the signal comes to grab my bat and make my way to the on-deck circle, invariably the markets are hit with a bout of volatility. The result is that as a “volatility guy” I often end up talking about what to do in an environment of elevated volatility, as was the case in Seizing Opportunity from Stock Market VolatilityBe Greedy While Others Are FearfulCalm Down and Exploit Others’ Anxieties and There’s Opportunity in Uncertainty.

My thesis in the Barron’s article is fairly simple and should not come as a surprise to those who have been paying attention to what I have been saying in this space over the course of the past decade:  VIX spikes are typically a gift from the mean reversion gods.The trick, of course, is in the timing of the mean reversion – and perhaps whether to bother to make the distinction between mean reversion and median reversion.

In the chart below, one can see VIX data going back to 1990, with the mean of 19.71 added as a dotted red line. Even a quick glimpse at the graphic reveals just how difficult it is for an elevated VIX to stay elevated, regardless of the cause.

 [source(s), VIX and More]

The Barron’s article talks about some trading opportunities that arise from VIX spikes and includes a bull put spread trade idea involving QQQ

I have remarked on a number of occasions in the past that whenever Steve Sears reaches out to me to pen a guest column, inevitably some invisible market force snaps to attention and arranges for a volatility spike. Either Steve has some amazing insight into the future of volatility (not unthinkable for a guy who was a driving force behind the creation of the ISEE Index) or some other unseen forces are toying with me. If this happens one more time I am going to start to wonder if I have an obligation to publicly disclose future column requests.

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