Near-Record Market Volatilty

My partner and I have developed several proprietary measures for risk management.

Among them is a proprietary volatility metric based on S&P daily returns.

The accompanying chart displays this measure from 1950 through the end of last month.

Should you be in any doubt about current market volatility, this chart will end it. We are currently experiencing greater equity market volatility, on a daily basis, than at any time in the past 50+ years, except for the month surrounding the crash of 1987.

The peak measure of our volatility measure during the crash was 6.1%. Today's new high for this period is 3.6%.

Although we only actively invest in equity calls and puts now, we still track the underlying equity portfolios. Based upon our equity risk management tools, we would have shifted to a short portfolio in July. That portfolio is up over 23% as of this morning. Combined with modest losses in the first half of the year, the overall equity strategy would be up about 20% on a gross basis.

With the chart above as a guide, we are once again focusing on buying puts for the near term. The record volatility in the S&P confirms that we are in very rare market conditions, but, never the less, conditions that support being short, not long.