Volatility is Freakish Because of Algorithmic Trading

OK, these two articles are so relevant I took bits of both headlines and put them together.

Now I try to make sure that articles I link to are not behind a paywall. But sometimes, the articles are so compelling, I have to let you know about them anyway. And hopefully, you can find a way to read them.

The first is a Bloomberg article about volatility, and it is all about how the market is super calm, followed by these crazy eruptions…

WHICH IS EXACTLY WHAT I HAVE BEEN SAYING FOR OVER A YEAR NOW!

In the first sentence, Bloomberg describes the market as brittle, which is not too different from what I started calling it back in the summer: FRAGILE. In fact, that is the exact term I used in this week’s live ODDS Online Coaching class.

The second article is from Steve Sears at Barron’s.

And in that article, Steve points out how liquidity is being hampered by algorithmic trading and market making.

I COULD NOT AGREE MORE.

Here are links to both articles:

Stock Volatility Isn’t Dead. It’s Just Got Freakish and Extreme

How to Make Sense of the Stock Market in the Age of Algorithmic Trading

After reading this, you should have a pretty good idea of why we are so focused on our “dispersion” style of trading where we focus on buying straddles on individual stocks and selling credit spreads on broad-based indexes. Because you never know when one of those shocks is going to come. But until it does come, volatility is likely to remain subdued. So you have to use a strategy that can generate decent returns in two very different ways.

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