×

Higher volatility here to stay, options experts warn

Is higher volatility here to stay?

As the market has risen over the past five years, the CBOE Volatility Index has averaged a reading of 17.5, which is below its classical average of 20. That means that expected market volatility has been lower than its historical norm—a normal condition when markets are on the upswing. And while there have been several recent spikes above the widely watched 20 number, few have lasted as long as the current period of higher expected volatility.

While the VIX has fallen over the past week, it is spending its 18th straight session above the 20 mark on Wednesday. That's the longest the VIX has stuck above 20 since summer 2012.

And after a prolonged period of depressed volatility, many options experts don't see the VIX falling back to its lows anytime soon.

"The market is moving enough to support the volatility," pointed out Stacey Gilbert, head of derivative strategy at Susquehanna, in a Tuesday "Trading Nation" segment. "Until we get to a period where we don't move for a while, that implied volatility will stay higher."

More generally, "traumatic events require a period of recovery before normalcy returns," Jim Strugger of MKM Partners wrote in a Wednesday note. After the swift August selloff, the "emotional aftermath for U.S. equities is reflected via the length of the period that spot VIX and the futures curve remain elevated and distorted."

"No matter the outcome of the FOMC meeting tomorrow, U.S. equity volatility is likely to be higher in the short term," Strugger wrote.

Read MoreWhen the Fed raises rates, here's what happens

In fact, Strugger and others have recently discussed the possibility that the low-volatility "regime" is over or at least on hold, which would have broad implications for investors.

"We're clearly going into a different stage, given concerns about what monetary policy will be going forward and concerns about the economy globally," Albert Brenner of People's United Wealth Management said Tuesday on "Trading Nation."

"We do think volatility is likely to stay higher while we are dealing with that uncertainty. ... We've really been through a placid period of time, and we're likely to get a lot more client concerns."

These 8 stocks could be in big trouble if rates rise

Of course, some are on the other side of the trade.

Neil Azous of Rareview Macro recommends doubling down on trades that profit when implied volatility decreases, as it has of late.

"We are looking for U.S. equity volatility to continue to decline after the Fed meeting on Thursday," Azous wrote Wednesday. "If the Fed is able to manufacture a quarter-end rally, it is more than likely that 40-50 percent of that move higher in equities is front-loaded on Thursday following the meeting and Friday."

A speedy relief rally would, in turn, likely cause the VIX to drop dramatically.

Whatever happens, the heightened volatility has certainly been good for options traders. August options volume was up 12 percent since July and 33 percent versus August of last year, according to TABB Group.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more

Connect