Sometimes how we feel about the market bears absolutely no resemblance to reality. When I look back at 2016, I’m exhausted. And when I talk to many advisors, I hear similar comments: “What a year!” they say. “We had such an awful winter, and then all the craziness around the election!”
But the reality is that this was actually one of the most placid years in recent history. Here’s the actual, 30-day realized volatility of the S&P 500 for the last 10 years:
What this excellent chart from Bloomberg suggests is that our current market is in one of the lowest volatility periods we’ve seen in ages, and while we’ve had some spikes, particularly in the spring, it’s just about as boring a market as you can get.
Of course, you can’t actually trade this chart; instead, what you can trade, sort of, is the CBOE Volatility Index, or VIX—a derivative calculation based on the implied volatility of strips of S&P 500 options. Here’s what the VIX chart looks like over the past 10 years:
Even the quickest glance suggests these are pretty good proxies for each other, and while they’re not identical, they even “base” around the same number: 10 for low-vol periods, 80 for crazy spikes.
And using options is actually sensible, because for a sophisticated investor, making a specific bet on volatility would most easily be done with options. You want to bet the S&P 500 is going to spike in either direction? Options players have a plan for you—a straddle. Think we’re range-bound and want to bet on it? The wonderfully named Iron Condor is for you.
Managing volatility is in fact what options are designed to do, so that’s why the CBOE uses the real-world expressions of sentiment from options traders to compute the VIX.