I love all your write ups and this was the series that got me subscribed in the first place. By any chance are you planning on revisiting the topic of volatility with the current economic climate?
Great work. Found it really interesting from when I read the initial theory in 2021. I've taken a very different road but arrive at a similar perspective we might be about to see something a lot of people will find very surprising.
While any general bear thesis presented late 2021 didn't look too good for a while, I think it's notable the VIX did actually begin to uptrend from around the time of your post.
Now we're just waiting to see if that continues after the current pullback. I'd say if it's on, we may be seeing it within the next 3 months.
Love your writing and insights. I tend to agree with you on most everything but can't put it into words the way you can. Thanks for making us a bit smarter each day - really appreciate it.
I love your writing and loved your thesis, but never bought it 100%. I think a more generalized thesis is more appropriate: "Volatility goes up with counter-trend moves" (instead of "volatility goes up with down-moves")
Since markets go up most of the time, your narrower thesis is correct most of the time, as bull market sell-offs bring up high volatility. In secular bear markets, however, this does not hold, and in fact you can see sharp increases in volatility during bear market rallies.
I like a hydraulic analogy: a bull market is like pumping water up a tower: as long as the pump is working the water level rises. However sometimes you get a momentary power outage, the pump goes OFF and you see violent spills downward, until power is restored.
In a bear market you don’t have this pump action, you don’t have the accumulated pressure (i.e. unrealized paper profits) that can violently spill down when the pump seizes (i.e. market panic attack).
Thank you for reading! In your analogy, isn’t the accumulated pressure in a secular bear market the entirety of gains from the bull market run? We only have two secular bears to look at for comparison. First, 2001/2 in which the peak vol in the Bear cycle matched that of the bull several years earlier. Second, 2008/09, which recorded the highest vix reading in history. I think the expansion of the volatility complex since then will make these dynamics even more pronounced in the current environment. Time will tell.
Thank you! Trading view has a great product and is my go-to. Some of these charts don’t render with the best clarity in these posts unfortunately, because of file-size concerns for emailed content.
The market is steadily bidding vol, not panic bidding it. Panic bids are what causes VIX and VVIX to have a strong correlation to one another(See: Aug 2015, Jan 2018). I would incline you to look at how VVIX performed alongside VIX during Feb 2016 and Dec 2018's sell offs. When the sell off is orderly and everyone expects it(This current sell off) then there is no dramatic spike in VIX and VVIX. Eventually the seeds for the next major vol event are being planted when everyone refuses to bid vol again.
What you are suggesting is not too far off from what I’ve written. All layers of the vol market need to be bid in sync for a true spike. In hindsight people may call it a “panic bid” but in reality it is often a strong, deliberate bid in vol first that creates the panic
Great write up!
I love all your write ups and this was the series that got me subscribed in the first place. By any chance are you planning on revisiting the topic of volatility with the current economic climate?
Thanks Thwipster - yes definitely plan to update the analysis soon - likely in the coming weeks. Stay tuned!
A naïve question, does VVIX affect option pricing for products such as UVXY, VIXL etc.?
Great work. Found it really interesting from when I read the initial theory in 2021. I've taken a very different road but arrive at a similar perspective we might be about to see something a lot of people will find very surprising.
Thank you! Yes, time will tell
It always does.
While any general bear thesis presented late 2021 didn't look too good for a while, I think it's notable the VIX did actually begin to uptrend from around the time of your post.
Now we're just waiting to see if that continues after the current pullback. I'd say if it's on, we may be seeing it within the next 3 months.
Love your writing and insights. I tend to agree with you on most everything but can't put it into words the way you can. Thanks for making us a bit smarter each day - really appreciate it.
Too kind. Thank you, and thanks for reading.
I love your writing and loved your thesis, but never bought it 100%. I think a more generalized thesis is more appropriate: "Volatility goes up with counter-trend moves" (instead of "volatility goes up with down-moves")
Since markets go up most of the time, your narrower thesis is correct most of the time, as bull market sell-offs bring up high volatility. In secular bear markets, however, this does not hold, and in fact you can see sharp increases in volatility during bear market rallies.
I like a hydraulic analogy: a bull market is like pumping water up a tower: as long as the pump is working the water level rises. However sometimes you get a momentary power outage, the pump goes OFF and you see violent spills downward, until power is restored.
In a bear market you don’t have this pump action, you don’t have the accumulated pressure (i.e. unrealized paper profits) that can violently spill down when the pump seizes (i.e. market panic attack).
Thank you for reading! In your analogy, isn’t the accumulated pressure in a secular bear market the entirety of gains from the bull market run? We only have two secular bears to look at for comparison. First, 2001/2 in which the peak vol in the Bear cycle matched that of the bull several years earlier. Second, 2008/09, which recorded the highest vix reading in history. I think the expansion of the volatility complex since then will make these dynamics even more pronounced in the current environment. Time will tell.
Great piece. Random question, but besides TradingView, are there other providers you use for your charts?
Thank you! Trading view has a great product and is my go-to. Some of these charts don’t render with the best clarity in these posts unfortunately, because of file-size concerns for emailed content.
The market is steadily bidding vol, not panic bidding it. Panic bids are what causes VIX and VVIX to have a strong correlation to one another(See: Aug 2015, Jan 2018). I would incline you to look at how VVIX performed alongside VIX during Feb 2016 and Dec 2018's sell offs. When the sell off is orderly and everyone expects it(This current sell off) then there is no dramatic spike in VIX and VVIX. Eventually the seeds for the next major vol event are being planted when everyone refuses to bid vol again.
What you are suggesting is not too far off from what I’ve written. All layers of the vol market need to be bid in sync for a true spike. In hindsight people may call it a “panic bid” but in reality it is often a strong, deliberate bid in vol first that creates the panic