First off, thanks for all your kind words yesterday, it really meant so much to us.
I plan to return to the turrets next week, but I had this post mostly written on Tuesday night so figured I might as well throw it out in case the VIX goes back to 25 by Monday (OK, not anticipating that).
In light of our discussion on volatility and what it means in regards to an expected trading range over a year, how about what it tells you for a day?
Well, this from Options News Network.
Volatility is almost always expressed as the annualized standard deviation of returns. But an important characteristic of volatility is that it is proportional to the square root of time. That means we can approximate volatility over a smaller time period than one year by dividing the annual volatility by the square root of the number of trading periods we are interested in.
So if we want to convert annual volatility to daily volatility, we can divide by 16, which is the square root of 256 -- about the number of trading days in the year.
I believe the real numbers are 252 and 15.87, but I sound like the nerd raising his hand in the front of the class questioning that, as it's essentially the same answer.
So to translate this into our current market, consider if you pay mid 60's volatility in SPY. It is essentially a good purchase if the market moves 4%. Which seems to happen just about every day now. Not to mention the path to the 4% move, which may involve trips up and back and up and back. So you can see why mid 60's VIX is not quite so insane.
Now of course it's not going to stay like this forever. Some more up and backs and we'll have officially churned within a range. And volatility will come in, perhaps not associated with an actual rally. Not predicting anything, just laying out that possibility.
