During his recent interview with Tobias, Jim Carroll, the @vixologist on Twitter and Senior Vice President and Portfolio Manager at Toroso Advisors, discussed The Vol Tsunami Of 2020. Here’s an excerpt from the interview:
Tobias: Last year was an interesting year in volatility, which is not always true. Not every year is an interesting year in volatility. Last year was particularly interesting because we had the gigantic crash at the start, which is the most rapid crash, more rapid than 1929 volatility had that unprecedented spike. Then it was a lumpy term structure because of the election. Early in the year, there was a lot of fear around the election, so people will long volatility. Can you walk us through what happened last year? What was unusual about it beyond that?
Jim: [laughs] Well, yes, as you said– what was interesting was, we started off the year, fairly benign, equities churning higher, volatility relatively low, down in the teens. People, essentially, not appreciating the potential of this COVID thing, until the very end of February.
Then it was just like, somebody opened the trapdoor, and the whole market fell through. The market with VIX in the teens was clearly not pricing the what happened. I mean, who would? It was one of those tsunami kind of events, where you wake up one morning, and maybe you turn on the TV or somebody sends you a text. “Do you know that there’s 100-foot wave headed toward your beach, Toby?” [chuckles]
You might want to get out of the way. Well, how quickly can you get out of the way? Clearly, this was a circumstance where people were not prepared to get out of the way of the pandemic. It slammed hard, limit down day after limit down day. VIX crept up steadily to a brand-new closing record in the 80s.
The relief package, the Fed actions, it was reminiscent of the end of 2018 when we had the little fear that the Fed was going to tighten and the markets sold off hard, and then they came out and said, “No, we’re just kidding.” The market turned right around and started marching higher again. This was very reminiscent of that episode. Hardcore sell-off, and then March 23, the market bottoms and turns around and obviously there were hiccups along the way, but generally, just started marching back to all-time highs.
People scratching their heads saying, “There’s no way. How can we go back to all-time highs?” That’s expressing itself in the volatility space because as we have notched all-time highs, I’m looking at the market today, we’re not quite there on the S&P, but the Russell’s caught up, a lot of single stocks have just blown through their previous all-time highs. Yet, VIX and the VIX futures are sticky in the low to mid-20s. We’ve been above 20 since February 24th.
I’ve lost track of the day count, I’ve got it someplace, but it’s the second-longest stretch of VIX north of 20. The prior one being in the 2008-2009 timeframe. Somebody out there is still a little nervous. There’s still a bid for insurance in the volatility realm.
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