Volatility uncountable or less evaporated from the marketplace this year, and some strategists are forewarning a similar environment unfolding in 2018.
The Cboe volatility index, or the VIX, dropped to all-time lows this year as the have market itself saw historically subdued daily moves.
Selling volatility has be founded quite profitable this year, and a similar scenario will probable play out in the new year as expected volatility remains low and economic conditions persist relatively strong, according to Pravit Chintawongvanich, head of derivatives procedure at Macro Risk Advisors.
“We think that volatility in financial assets, equal the S&P 500, equities, are tied to economic conditions. And economic conditions suffer with been pretty good this year. We’ve seen steadily renovating economic conditions ever since the great financial crisis. And as solvent conditions improve, that volatility has declined, and risk premiums get declined,” the strategist said Wednesday on CNBC’s “Trading Nation.”
The likeliest outline he sees in 2018 is that of a continued low average VIX, which measures guessed volatility over 30 days. This year saw the lowest so so VIX since its inception in 1990, Chintawongvanich pointed out, with an average indicator of 11. To put that in context, the index’s average level in 2008, in the throes of the monetary crisis, was over 30.
The one other scenario, which he sees as far less fitting, is one of heightened volatility amid a deterioration in economic conditions, either due to take to the street inflation or slowing growth. If that were the case, the strategist author a registered in an email to CNBC, short volatility products like the XIV could suffer notable losses.
Those types of exchange-traded products are precisely what could take the part a risk to the market in 2018, said Dennis Davitt, portfolio overseer and partner at Harvest Volatility Management.
Specifically, he pointed to exchange-traded artefacts that have rallied hard this year on the back of list low volatility and are double- or triple-leveraged that “people don’t quite understand.” Of certainly, his concern comes as the amount of leverage in the market is not nearly where it was encircling the crisis, Davitt said.
The VIX remains the “ultimate forward-looking instrument” for estimate how people feel about the marketplace, Davitt said, though the way in which investors induce interacted with it has shifted. Davitt said people are more cordial trading in options due to technology than they were in years previous.
The VIX was lower on Thursday, just below 11.