10 Minute Read

Tackle Today: Tale of Two Vols

March 5, 2020

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Tale of Two Vols - Photo by Erol Ahmed on Unsplash

≈ The equalizer ≈

We don’t live in the same country.
We don’t trade at the same hour of the day.
We don’t have the same age.
We differ in social stratification.
We might even trade in different exchanges.
We don’t trade the same assets.
Non-alcoholic beer to celebrate an IPO.
Or a dark Irish dry stout Guinness to celebrate a green day.

However, us or them.
Humans or machines.
Inside the markets, we are all the same.
Old or bold.
The penny stock guy.
The stock forum lady.
Or the soulless algorithms.
One equalizer.
To the markets, risk is volatility.
Volatility, then.
Vol, for the intimate.

It’s all about Vol.
When we take the money out of our pockets.
And throw it into the market.
That’s Vol we are signing up for.
Risk-averse people buy low Vol.
Limited amplitude. Symmetrical distribution.
Experienced risk-takers buy high Vol.
Wide amplitude. Asymmetrical distribution.
Vol can be precisely measured. Present tense.
Vol can be historically evaluated. Past tense.
Vol can be forecasted. Future tense.
The future tense is far from trivial, though.

Vol in the future can behave as usual or helter-skelter like nothing else.
Risk-averse people buy trivial Vol. Homoscedastic but opaque. They buy a dog and end up petting a cheetah.
Experienced risk-takers buy helter-skelter Vol. Heteroscedastic and transparent.
They get what they paid for.
When panic sets in.
Trivial Vol ends up on the hanging tree.
Fiery Vol sails on the steel breeze.

The sun shines on everyone. Hedging too.
For the homoscedastic: Trivial Vol + Long anti-fragility.
For the heteroscedastic: High Vol + Pray for a stroke of good or bad luck.

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Homoscedasticity & Heteroscedasticity

Homoscedasticity & Heteroscedasticity (source: Wikipedia)

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