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Socially Acceptable Volatility

Trading Term

A term coined by Barron’s columnist Steve Sears, refers to the psychological tendency for options traders to adjust their volatility assumptions differently depending upon the direction of a market’s move, and for stock investors to incorrectly analyze strong stock advances. Measures of expected and implied volatility, such as the Cboe’s VIX, tend to rise when stocks fall but remain unchanged or even decline when stocks rise by a similar amount.  This is in spite of the fact that measures of actual volatility, such as historical and realized volatility, do not account for a move’s direction.  The phenomenon of Socially Acceptable Volatility occurs because rising stock prices make most everyone happy, but downward moves are perceived as distressing. 

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