Volatility

Back in the low volatility days, only some months ago, The Trader was arguing for a higher volatility environment ahead. The “Teflon” market was attracting too many people putting their money into the same trade. The Teflon market, caused partially by the QE2, made people believe the market would always stay high and volatility low. QE programs have created an environment where people driven by fear of missing out on the rally, simply put less weight on the possibility of risk coming back to the market. Back then, the VIX, proclaimed by CNBC as dead, was trading at 15, give or take.

During the last week’s harsh correction, many have been very wrong, and these short volatility players have been chasing volatility for some weeks. As Taleb once said, “Don’t buy vol when you have to, buy it when you can”. With vols and skew having hit some rather extreme levels, there could be some opportunities for the brave ones. Below some charts by Soc Gen;