Sucked in by volatility

It looks like the volatility trading crowd (at least if you were long) took a hit over the past week – things had looked like they were stirring up with the Irish debt issue, but it had abated over the week.

First, a chart of the S&P 500 volatility index (VIX):

Secondly, a chart of a high-volume Volatility ETF (NYSE: VXX):

Traders that were long for the week have taken over a 10% haircut. In fact, the ETF closed at a record low from its inception back in early 2009. The “spot” volatility index was down about 22% from the beginning of the week. How much lower can volatility go?

I have no positions in any of this, but do watch carefully – for example, when index implied volatility is low, it is usually a horrible time to engage in strategies like selling puts or calls. Conversely if you have any bullish projections to the future of the market, it is usually a good time to purchase calls since their pricing will be lessened by the overall volatility projection. What causes this is that there is some mean-regression baked into the quantitative models that option traders use.