LinkedIn with Background Education General Dictionary Economics Corporate Finance Roth IRA Stocks Mutual Funds ETFs 401 Investing/Trading Investing Essentials Fundamental Analysis Portfolio Management Trading Essentials Technical Analysis Risk Management Markets News Company News Markets News Trading News Political News Trends Popular Stocks Apple Tesla Amazon AMD Facebook Netflix Simulator Your Money Personal Finance Wealth Management Budgeting/Saving Banking Credit Cards Home Ownership Retirement Planning Taxes Insurance Reviews & Ratings Best Online Brokers Best Savings Accounts Best Home Warranties Best Credit Cards Best Personal Loans Best Student Loans Best Life Insurance Best Auto Insurance Advisors Your Practice Practice Management Continuing Education Financial Advisor Careers Investopedia 100 Wealth Management Portfolio Construction Financial Planning Academy Popular Courses Investing for Beginners Become a Day Trader Trading for Beginners Technical Analysis Courses by Topic All Courses Trading Courses Investing Courses Financial Professional Courses Submit Stock Trading Stock Trading Strategy & Education Penny Stock Trading Stock Trading Stock Trading Strategy & Education Why Volatility Is Important for Investors FACEBOOK TWITTER LINKEDIN By Hans Wagner Fact checked by Skylar Clarine Article Fact Checked on November 24, 2020 Full Bio Skylar Clarine is a fact checker and expert on personal finance. Learn about our editorial policies on November 24, 2020 Table of Contents Expand Volatility Defined Market Performance and Volatility Factors Affecting Volatility Assessing Current Volatility in the Market Using Options to Leverage Volatility The Bottom Line The stock market can be highly volatile, with wide-ranging annual, quarterly, even daily swings of the Dow Jones Industrial Average . Although this volatility can present significant investment risk, when correctly harnessed, it can also generate solid returns for shrewd investors. Even when markets fluctuate, crash, or surge, there can be an opportunity.
This strategy is a simple but expensive one, so traders who want to reduce the cost of their long put position can either buy a further out-of-the-money put or can defray the cost of the long put position by adding a short put position at a lower price, a strategy known as a bear put spread . Continuing with the Netflix example, a trader could buy a June $80 put at $7.15, which is $4.25 or 37% cheaper than the $90 put. Or else the trader can construct a bear put spread by buying the $90 put at $11.40 and selling or writing the $80 put at $6.75 , for a net cost of $4.65.
Why Volatility is articles on stock market volatility Important for Investors
When volatility increases and markets panic, you can use options to take advantage of these extreme moves or to hedge your existing positions against severe losses. When volatility is high, both in terms of the broad market and in relative terms for a specific stock, traders who are bearish on the stock may buy puts on it based on the twin premises of “buy high, sell higher” and “the trend is your friend.”
Changes in inflation trends, plus industry and sector factors, can also influence the long-term stock market trends and volatility. For example, a major weather event in a key oil-producing area can trigger increased oil prices , which in turn spikes the price of oil-related stocks.
Regional and national economic factors, such as tax and interest rate policies, can significantly contribute to the directional change of the market and greatly influence volatility. For example, in many countries, when a central bank sets the short-term interest rates for overnight borrowing by banks, their stock markets react violently.
Fidelity Investments. ” Snapshot: NFLX ,” Download “Price History.” Accessed Nov. 24, 2020. articles on stock market volatility
The Cboe Volatility Index detects market volatility and measures investor risk, by calculating the implied volatility in the prices of a basket of put and call options on the S&P 500 Index. A high VIX reading marks periods of higher stock market volatility, while low readings mark periods of lower volatility. Generally speaking, when the VIX rises, the S&P 500 drops, which typically signals a good time to buy stocks.
When the average daily range moves up to the fourth quartile , there is a probability of a -0.8% loss for the month and a -5.1% loss for the year. The effects of volatility and risk are consistent across the spectrum.
The higher level of volatility that comes with bear markets can directly impact portfolios while adding stress to investors, as they watch the value of their portfolios plummet. This often spurs investors to rebalance their portfolio weighting between stocks and bonds, by buying more stocks, as prices fall. In this way, market volatility offers a silver lining to investors, who capitalize on the situation.
The VIX is intended to be forward-looking , measuring the market’s expected volatility over the next 30 days.
For example, when the average daily range in the S&P 500 is low , the odds are high that investors will enjoy gains of 1.5% monthly and 14.5% annually.
For example, Netflix closed at $91.15 on January 27, 2016, a 20% decline year-to-date, after more than doubling in 2015. Traders who are bearish on the stock could buy a $90 put on the stock expiring in June 2016. The implied volatility of this put was 53% on January 27, 2016, and it was offered at $11.40. This means that Netflix would have to decline by $12.55 or 14% before the put position would become profitable.
In a 2020 report, Crestmont Research studied the historical relationship between stock market performance and volatility. For its analysis, Crestmont used the average range for each day to measure the volatility of the Standard & Poor’s 500 Index . Their research found that higher volatility corresponds to a higher probability of a declining market, while lower volatility corresponds to a higher probability of a rising market. Investors can use this data on long-term stock market volatility to align their portfolios with the associated expected returns.
Crestmont Research. ” Volatility in Perspective .” Accessed Nov. 24, 2020.
Strictly defined, volatility is a measure of dispersion around the mean or average return of a security . Volatility can be measured using the standard deviation , which signals how tightly the price of a stock is grouped around the mean or moving average . When prices are tightly bunched together, the standard deviation is small. stock articles singapore