Global equity volatility has fallen rather sharply over past sessions as markets have managed putting in a good bounce. Two weeks ago we suggested volatility, especially US equity volatility, had spiked too much and wrote:
Running to buy protection in form of volatility is probably a late trade for the short term. Volatility is a mean reverting asset over time and chasing it is often not a great strategy.
We also pointed out the market was sitting at support levels and that the put/call ratio had gotten too high, ie people were buying a lot of puts compared to calls. We suggested:
“…. the CBOE put/call index. We have seen a huge jump in people buying puts compared to calls, ie investors buying protection. This is often proved to be a short term contrarian signal, ie people buy protection too late.”
Since then VIX has imploded and is now back to big support levels. With markets sitting at highs once again, the prudent investor should start looking for long volatility trades as volatility went from recently trading rather rich to now trading at attractive levels.
Euro Stoxx 50 volatility (V2X) has also imploded over past 10 days and is approaching “natural floor” levels.
We have said it before and will say it again:
“Never buy volatility when you must, buy it when you can”
Source: charts by Bloomberg
