Monday Morning Link

I’m not normally a big linker, but every once in a while I stumble across something I think is worth other people’s time.  This morning it’s:

http://condoroptions.com/2012/08/27/fear-of-the-unknown-volatility-of-volatility-predicts-stock-returns/

If you’ve ever wondered where trading systems come from, it’s ideas like this.  The theory here is that it’s good for a stock’s future price if the level of uncertainy (known in technical terms as implied volatility or IV) is fairly constant, regardless of what that level of uncertainty is.  It’s bad for the price when the IV varies a lot.  This makes sense – most people, when confronted with a situation that was not only uncertain, but where they couldn’t gauge the level of uncertainty, would run away.  Too risky.  To weird.

Food for thought…

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2 thoughts on “Monday Morning Link

    • That’s the idea. Although they may not be talking about one change in implied volatility (high->low or low->high). It quite likely cycled multiple times during their measurement period.

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