Macro to Micro Volatility Trading

Volatility has always been one of the defining characteristics of oil prices and is apparent at all time scales from the very short term seconds, minutes and hours to long periods months, years and decades. But the concept is notoriously slippery and how traders talk about it does not necessarily correspond with the way in which the concept is understood by producers and consumers. Volatility has a precise definition in finance where it is a statistical measure of the dispersion standard deviation of price movements.

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Volatility is normally measured over a short interval most often daily price changes , evaluated over a short period of time usually over 20 or 30 days and expressed at an annualised rate. Volatility as the term is employed by traders is a good measurement of how much prices jump around over short time scales.

But in ordinary language the term is used to refer to big price swings such as the near-quadrupling in oil prices between and and the more-than-halving of prices between and Micro-volatility as understood by option traders is not the same as the macro-volatility as understood by oil producers and consumers. If oil prices rose by 1 percent per day for days, micro volatility would be zero but macro volatility would be very high. Micro volatility is concerned with the smoothness with which prices move while macro volatility focuses more on the overall scale of the cyclical swings.

Oil prices can jump around a lot from day to day in which case micro volatility is high while remaining trendless macro volatility is low. Or prices can move only a small amount each day low micro volatility but exhibit large and sustained rising or falling trends high macro volatility.

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In a further wrinkle, price volatility can be measured in terms of either dollars per barrel or percentage price changes. Percentage changes tend to be higher when oil prices are low because the same dollar move is a greater proportion of the base price. Oil refiners tend to be more worried about dollar changes because their throughput margins are based on dollars per barrel. Crude option traders tend to focus on percentage price moves because these are the inputs into their pricing models.

Researching cotton prices, mathematician Benoit Mandelbrot discovered there were far more very large daily price moves than would be expected if changes followed a normal or Gaussian distribution.

Macro to Micro Volatility Trading - Kindle Edition Ebook

Mandelbrot was writing about micro volatility but his observations about the volatility of volatility also apply at macro scales. Oil prices exhibit both regular up-and-down cycles from one month or one year to the next, as well as huge price spikes and crashes tmsnrt. Regular cycles pass almost unremarked while spikes and crashes catch the popular imagination as booms, busts and super-cycles. Has something fundamentally changed?

If yes, then action may well be appropriate.

Global Macro Strategy

If not, then doing nothing is likely the best course of in action. Recall that the mid-term aftermath is where stocks peaked last week. Sure I see where earnings have been a factor, but in cases like Apple and Google one could argue that the quarterly meeting caused the shares to really sell off hard.

I agree that investors feel 'emboldened to sell', an impulse which has frequently been lacking for most of the period stretching back to July I view share buybacks as a tax efficient DRIP.

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Many investors check a box with their broker electing to reinvest all dividends. It is true that GE is looking to deleverage its operations, which insinuates that issuing any form of dividend to shareholders was in retrospect not the best use of scarce capital. The whole term structure got a boost on Monday. Spot VIX was up 3 vol points from last week's close, and finished on the day's highs. Given the clustering, it would not surprise me if the term structure has it more or less correct here, and that the various other measures meet in the middle, right around Keep in mind that the November contract is already approaching its expiration next Tuesday is the last full day.

WTI was down for the 11th straight day: For those considering a short-vol position, I am including comparisons of the term structure for SVXY for today, Friday, and thirty days ago.

Oil Pricing and Volatility

The term structure has lowered over the last month, and also flattened. If this is your first time reading Market Volatility Bulletin, thanks for giving it a try. If you're a regular, we thank you for your ongoing contributions in the comments section.