Volatility and Complacency

Volatility and Complacency

The stock market seems to have been incredibly complacent, of late, at least as measured by volatility. Generally, volatility moves in ranges. When the environment is stressed, as it has been, VIX tends to bottom out around 16, about where we are now. That stress comes from the existence of actual and potential problems, which is why there tends to be a floor, as more problems come to fruition. Is this time different?

As usual, I suppose, there are some people who think so. There are certainly people who think the strong rise of 0-day to expiration (0DTE) options has suppressed volatility enough to break that model. I do think there’s something there, just in terms of an expanding pool of people who are very short-term oriented. They don’t care about a recession tomorrow. That’s tomorrow’s problem.

That’s fine, but the risks of recession don’t go away, they just get concentrated more into tomorrow. What’s going on in options, in my mind, is going on in the market in general. Yes, I think it’s fair to say 0DTE options suppress volatility, but that also increases the violence of downside moves. Any surprise is a real surprise if investors aggressively refuse to price it in. In plain English, we may have a lot of calm days, which in turn helps keep volatility low, which then allows people to take more risk, but that also means we shouldn’t be shocked by occasional, large losses.

Put it this way. Let’s say something pretty bad happens. All the people who want to get out can’t get out at once. Further, when that set of buyers disappears, you need a different set of buyers. Momentum and trend buyers aren’t going to buy when there’s no momentum or trend. Value buyers are likely a long way from buying ARKK stocks. Ultimately, it’s not really a profit until you sell it, and the downside can be rapid and harsh.

You need to have an investing plan before you even start. For our part, we aren’t daytraders, so we’re not playing the 0DTE game. We try to focus the bulk of our energy on long-term gains. Thus, while we’re subject to these machinations on a daily basis, we have a different goal. For our part, we do care about recession, even if it’s months from now. We’re happy to take high-percentage short-term opportunities if they present themselves, but right now, we’re at the lower end of a volatility range and the upper end of a trading range. For us, now is a time to be patient, and not a time to chase. With recession brewing, we’ll wait for fat pitches, and right now looks nothing like that.