With stocks sliding further and further down the rabbit hole despite a short boost from a friendly jobs report, volatility is continuing to expand at a rapid rate. Yesterday, the VIX surged 35% to close at its highest levels this year since the Japan quake in March, and today, it jumped another 22% to 38.55- the highest intraday level since May 2010.

What does this mean? As a refresher, the VIX, or Volatility Index, shows the market’s anticipation of 30-day volatility. It is calculated with the implied volatilities of a variety of S&P 500 index options with both puts and calls, and is intended to be predictive. Typically, people view the VIX as a measure of investor fear and market risk, so when the VIX goes up, it indicates potentially higher risk and fear, whereas when it goes down, it’s supposed to signify market confidence.

There are a few interesting things to note here. First, it wasn’t that long ago that we discussed the concept of Zombienomics presented by David P. Goldman. He argued that the economy would continue to slump around in low volatility levels, but would not fully recover for years. Our response? Verbatim:

History is ripe with examples of low volatility periods ending with spikes higher in volatility, and indeed it is often used as a contrary indicator for upcoming market declines.

Is an “I-told-you-so” appropriate here? The point is, when dealing with periods of low volatility, things are usually ok… until they aren’t. This is the VIX over the past 5 days. The severe upward slope started  yesterday- no gradual build up in sight. If we see another surge, the VIX could theoretically double within a two day period.

For managed futures investors, the question weighing on everyone’s mind is how this is going to impact their portfolios. First, if you have a stock index option selling manager in your portfolio – the volatility spike is not a good thing. They are selling the very thing which has nearly doubled in price, which is tough to get through without losses.

But outside of option sellers, such volatility spikes are usually a good thing for managed futures and trading systems, which, unlike option sellers, usually have a long volatility profile. This profile is a result of risking a fixed amount per trade (usually a percentage of equity), but allowing the models to earn as much as the market will allow them to. When volatility spikes and markets start moving drastically – the amount of potential profit expands dramatically, while the risk remains at the same level. In contrast, an option seller has a fixed amount they can make, while the amount of loss can blow out dramatically based on what the market is doing. They are, in many ways, mirror images of one another.

Pundits are all over the place as far as what comes next. There are predictions of a 75% price correction, and our Twitter feed is a-buzz with folks saying we’ll see the markets bounce back big by the end of the day.  We don’t know what will transpire, and while the possibility of large single day losses for managed futures and trading systems has increased with the increase in volatility, the general affect of the VIX spiking should be beneficial to managed futures and trading systems, in our opinion.