The Risk of Rising Volatility

As a trader and portfolio manager I spend a lot of my time evaluating risk. The need to manage risk within a position and an overall portfolio is a key tenet in having long-term success in investing. One the methods I use to evaluate risk is by applying varies methods of analysis to volatility, which includes the VIX Index. Using a compilation of data inputs, below is a rough chart showing prior instances that match the current market environment as it pertains to the VIX.

When the data has been at these levels in the past, the Volatility Index has seen some fairly substantial advances, however, sometimes the move (like at the end of December ’16) are minor – but often we do indeed see a rise in volatility. As the chart below shows, sometimes it takes a week or several for the VIX to move higher but past occurrences haven’t seen the VIX decline much further from that point forward.

While I’m happy to see new highs in several of the major indices, I think the risk/reward right now, at least when it comes to the Volatility Index, has risen substantially.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.
  • Jim C

    VIX in a squeeze (Bollinger Bands inside Keltner Channels) and BB width shrinking tight. Now it starts to get interesting. As you know, this can persist longer than most would believe. But at these levels, it can only “resolve” to the upside at some point.