Market volatility is mostly as an emotional gauge.
As the fear spreads we see investors/traders reaching for protection – buying puts and selling stocks, willing to come back another day when it is safe. When the fear subsides and it’s safer to ‘dip your toe’ in the water we see volatility run down to much lower levels – players are not fearful of major market moves are scared of an unplanned event. That of course is complacency and is mostly indicative of an overbought market.
BUY SOME INSURANCE
When is the right time to buy volatility to protect your portfolio?
IT’S CHEAP NOW
Well, the timing can rarely be perfect, but anytime it’s this cheap you certainly couldn’t be blamed for buying it. After all, too many uncertainties are still out there that can ‘shake the trees’ a bit.
JUST IN CASE
As for the timing of buying insurance – let’s look at this example. Do you go out and buy fire insurance for your house when your neighbor’s roof is on fire? Of course not. We look at investing and portfolio insurance in the same vein, looking to protect ‘just in case.’ We don’t necessarily look for a payout on the insurance but perhaps it will serve to dampen overall portfolio volatility (even more than diversification).
Thursday’s low volatility has been driven down by low interest rates, an accommodative Fed that is more predictable and Euro zone bankers who surprise less these days to the side of negativity. Will higher risk and volatility return? Of course it will, the potential for blowing up market psychology is endless.
BOTTOM LINE?
Be prudent and protect your backside.
[Editor’s note: Is anyone surprised by the low levels of volatility right now? Post a comment and share your thoughs below.]
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