“A trade is two parts: probability times magnitude.” That was the line that struck me most from Cem Karsan’s conversation on volatility. Probability is easier to grapple with – the gut feeling, the neatly laid-out percentages of an options sheet, everything always adding up to 100%. Magnitude, though, can easily eclipse our basic understanding, and reverberate through markets and the world farther than we think. Magnitude is the butterfly effect.

Cem Karsan breaks down the market “Wall of Worry” as a supply and demand question: people buy puts, pushing up the prices, which then requires a bigger move in order to profit. On the other end of the equation, he says, are dealers who might have to buy the puts back. This pressure creates a skew that eventually will have to unwind – and the bigger it gets, the higher the magnitude of the unwind. He expects a peak on December 20, the monthly options expiration date, but for volatility to continue into January.

On the U.S. election, Cem discusses the odds of either party winning the House, Senate, and presidency. “It’s not just about who gets elected. It’s about the size and impact of the election.” What does it mean if one candidate is more likely to win the full slate? The magnitude of changes increases exponentially – which could push volatility even farther. Guests on Schwab Network have repeatedly said that the market prefers gridlock and certainty in politics – the road could get bumpy from here.

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