The Truth About Trading Volatility

In this three part series we take a deep-dive into the interworkings of volatility and volatility based products.

Nick Ethan - 11.10.2020

Time and time again I watch people load up on UVXY calls thinking they are going to catch some mega-drop and become a millionaire overnight.

Statistically speaking random bullish VIX swings have a very low probability, but our monkey mind seems to tell us otherwise. I wanted to share my experience of trading volatility and shed some light on the basics of the vix and volatility based products.

What is “the VIX”?

The VIX (aka the Volatility Index) is a ticker that tracks the current level of volatility (also known as risk and fear) relating to the market.

Common Traits of Volatility

When we see a spike in the vix, it is usually accompanied by a pullback in the market. These spikes are generally news or event related and fairly short lived.

Over time we can see volatility creep higher into a major event (an election, vaccine, etc). Volatility will then subside after a resolution and the unknown outcome is behind us.

Extreme Volatility

When volatility is at an extreme high, price action will be tumultuous and chaotic. The aggressive moves in both directions create a market that is “cycling” (you can learn more about “cycling” versus “trending” by checking out our Crash Course on Ehlers’ Cybernetics).

Low Volatility

When volatility is low, the price action will consolidate into a narrow, shallow uptrend. We saw this after the 2016 presidential election and into 2017. The market was absolutely unstoppable with the steady grind higher.

Parting Thoughts

Moments of extreme volatility are extremely rare compared to the amount of time the market spends with low volatility.

Unfortunately, we are wired with fear and our “fight or flight” monkey brain paints the illusion that the stock market is dangerous with the next crash hiding right around the next corner. In my experience, nothing is further from the truth.

The stock market follows universal laws of physics and will naturally expand during moments of calm. As long as we have population growth and continue to innovate as a species, the stock market will always expand.

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