Scott Nations: Options are very ‘cheap right now for a reason’


Scott Nations, chief investment officer of NationsShares and author of “A History of the United States in Five Crashes”, talks about the current low level of volatility in the market and what to do in the event of a crash.

Sarah Silverstein: And I also want to talk to you about volatility. You know a lot about volatility and we’ve been talking a lot about it because the VIX is really low. You prefer a different measure. Can you tell me about that?

Scott Nations: That’s right. Well, we have created our — we’ve created a different measure of volatility in the S&P world. It’s VolDex and the ticker symbol is VOLI. Anybody can go to their computer and punch up VolDex (VOLI) and they will get the Nation’s VolDex. We measure volatility the way market participants generally measure volatility. We look at at the money implied volatility, that is, how relatively expensive are at the money options on SPY. We much prefer that to the way the VIX is calculated.

Now, regardless of how you measure it, VolDex implied volatility is very low, much lower than has been historically. There are lots of reasons for that. Some say it’s complacency. I think it actually has more to do with the fact that the market just hasn’t been very volatile. It hasn’t bounced around. That’s realised volatility but it means that options just aren’t particularly valuable. It might be something to worry about. If complacency means people are going to do stupid things, then we know that that doesn’t end very well for the stock market right now.

Silverstein: Is it a good time to buy insurance?

Nations: You know, there’s a saying: “Buy protection when you can, not when you have to.” And it is certainly very cheap right now. It’s cheap right now for a reason. If I were at a point in my life, in a demographic where I knew I was going to need my money out of the stock market in five years, or maybe even 10 years and couldn’t afford to take a big hit, then I think buying protection in the form of options would make a lot of sense.

Silverstein: And do you think that maybe the volatility is really low, not because people are fearful, but because people are just not in the market?

Nations: I think a lot of people are in the market — it could be that they have just they have just put money in the market and they’re not paying attention to it right now. They’re not trading it as actively as they have in the past. That might be a case. That’s generally a good thing. The fact that people invest and let their investments work for ’em as opposed to trying to trade around it.

I also think that people have figured out that over time they can sell some volatility, they can sell some options to enhance returns in their portfolio and that obviously depresses the price of options.

Silverstein: Great. And one question, after looking at all this history, if you’re in the midst of a financial crash, what should you do?

Nations: You know what, if it’s already underway, then there’s not much you can do. The interesting thing is — the crashes are all similar and they all unfold really quickly. If you were to panic, once you’re in the middle of a crash, you will likely end up selling the bottom. What is more important in that situation is what happens afterwards. What is the governmental response afterwards. People have asked, “Why did 1929 turn into the Great Depression when 2008 turned into a much more, much milder circumstance?” It wasn’t mild in 2008 if you look at your home, your job or much of your money. But the governmental reaction is often really what tells the difference.

Federal Reserve was really on the case in 2009 and so if the Federal Reserve and the government are paying attention, then once we’re in the middle of a crash and you have a bit of money to put to work, you know, it’s not a bad time to buy the bottom.

Silverstein: Thank you so much and thank you to Scott Nations, author of “A History of the United States in Five Crashes.”