Wednesday, September 3, 2008

The Vomit Comet

For the last 35 years, NASA has had a famous plane that simulates weightlessness. It is nicknamed the Vomit Comet, for the impact it often has on its rider's constitution. I can only imagine what riding that plane must be like. But if there is a terrestrial proxy to the Vomit Comet, then I think this market is it. For example, since the beginning of 2008, the average daily volatility in crude oil has been more than $2.00. That is the most volatile period in the history of the market by far. 2007 comes in in second, at just over $1.00 of average daily volatility change. There have been years where the daily price change has represented a larger percentage of absolute price - the period of 1997-2000 was the most volatile from a percentage of the underlying commodity because prices were so cheap. But this is a misleading statistic, because most folks feel pain associated with absolute dollar losses and not percentage ones. For example, someone might buy one contract and see it go down $8 in one day. That is a $8,000 loss, and it is very painful to most folks. Well, it really doesn't matter whether the one day loss represents 1.5% of the underlying or 3% of the underlying, the investor still has to realize a loss of $8,000. The $8,000 loss makes him feel like his has taken a ride on that famous NASA plane.

Here is a list of the last ten years average daily price change:

1999 $0.34
2000 $0.65
2001 $0.52
2002 $0.44
2003 $0.58
2004 $0.76
2005 $0.90
2006 $0.93
2007 $1.12
2008 $2.08

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