It took 24 years, but the VIX Index has finally broken the record for the lowest close.
Now the VIX calculation has changed a little over time so it may not be the actual lowest close ever, but as far as extended periods of low volatility readings it’s definitely record setting. There’s no question that 2017 will be remembered for decades to come.
Viewed another way, here is a chart showing VIX values percentile rank since the XIV launched on Nov 30th, 2010.
You can see that to the far right, 2017 has just been relentless. The VIX has spent much of the year in the lowest 10% of all VIX values going backwards.
Based on the explosion of volume on these volatility products just in the last year or two, the majority of traders in this space are new. Few have likely seen a 5% correction in the S&P 500 and that in itself is dangerous. Starting in the heart of a multi decade outlier could easily skew a persons perspective.
There’s been a massive uptick this year in short VIX / long XIV articles and how this is all just free money. Something to keep in mind though, most are coming from people who run new and hyper specific businesses. They only trade volatility products, and in many cases only started very recently. It seems there’s a new curve fitted backtest launched everyday now, and their business depends on this party continuing.
Forget about volatility trading, or investing at all. This applies to all walks of life.
Anytime the people speaking the loudest are also the ones with the highest vested interest in others buying into it, it’s definitely worth taking a few steps back.
I will definitely continue to encourage people to focus on risk management and smaller allocations, and to be very careful of trading through extreme market outliers. Something I’ve learned over the years by going through all the market turbulence first hand is, if possible it’s always best to just not trade the extremes. It’s easy to see why in general people should avoid the panic side of things, but in my opinion it’s also equally important to avoid the exuberance side.
Imagine how much better people’s long term performance would be if they simply traded when markets are within normal parameters, and then had the discipline to avoid the extreme market environments where we have very few data points available.
That’s what we do at Volatility Trading Strategies. We dominate the market when the environment is conducive to our style of investing, and we avoid over trading during periods that aren’t. In my opinion, knowing when NOT to trade is one of the most under-appreciated skills in the investing world.
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