When Volatility Smiles At You, Smile Back

  • Volatility is a crucial tool we use in our evidence-based research. We walk you through how we used volatility in our analysis to infer 2021 would be a good year for equities and also in selecting which sectors, like Energy, we thought would do best in the past year.
  • The rapid proliferation of derivatives and financial instruments taking advantage of volatility empowers investors more than ever to define and prepare for risk. We discuss implications.
  • We address the post-pandemic volatility and discuss how our team makes inferences from analyzing volatility.
  • We introduce VIX term structure as a crucial indicator to pay attention to during heightened periods of volatility. We show that the VIX has been a highly useful indicator for our team.

“Sometimes the early bird gets the worm, but sometimes the early bird gets frozen to death.”-Myron Scholes

The word volatility probably has a lot of negative connotations for many investors. They associate it with red screens, losing money and gnashing of teeth. Memories of March 2020 and September 2008 come to mind. Recent volatility in large-cap technology names making up the Nasdaq, cryptocurrency and crypto equities may have frustrated you recently as well. However, what we want to convey to you is that while the initial impulse may be to become upset by volatility, there is also ample opportunity in it and ample tools to help you not only manage it but to also benefit from volatility.

The COVID-19 Crisis caused a lot of uncertainty and volatility. 2020 was one of the most volatile years for markets in history. Many investors may remember only the speedy crash in March when they think of volatility, but when you look at the VIX term structure, the curve was actually in backwardation for the entire year. This is one of the insights we used to predict that 2021 would be a relatively low volatility year compared to 2020 and what types of stocks tended to lead after years of anomalously high volatility levels.

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