How to Invest Using the Volatility Index

CBOE recently reported that the market volatility is at its low again,

All kidding aside, with about three weeks remaining, it’s been a fairly wonderful year for the S&P 500®. The large cap index is higher by about 25%. If the year ended today (12/6), this would be the best annual performance for the S&P 500® since 2013 (+29.6%) and the third best since 2000. The data below is through midday December 6.Source: S&P Dow Jones Indices More recently, S&P® 500 realized volatility (10- & 30-day) measured at more than two-year lows. One has to go back to October 2017 for realized volatility levels below where they were in mid-to-late November. There’s typically a relationship between historical and expected volatility in the broad market. As such, it’s not surprising that the VIX® Index measured 11.54 on November 26. That same day, 30-day HV in S&P® 500 dropped to 5.70%.

There are usually 252 trading days in a calendar year. Over the past decade, on average, there have been 52.8 moves of +/-1% (close over close) in the S&P® 500 per annum. Through December 6, there have been 38 in 2019. So over the past decade, on average, there’s a 1% S&P® 500 move roughly once every five trading days. Read more...

Looking at the market's performance over the past year, it makes sense that a great deal of investors feel the market rebounded too quickly. Many also believe that the market is set to correct after having recovered as aggressively as it did.
However, there is one way to examine whether the market's rebound was superficial or indeed worthy of continued growth and that is through the volatility index, or VIX as it is best known within the industry.

How To Use the VIX
Since volatility measures how much a trend will deviate from its norm, the volatility index expresses an amount of uncertainty among investors that the current trend or price movements will continue. This uncertainty makes sense because, as investors become less certain about a security or price, that number will shift wildly one way or another.
The VIX, therefore, tells us whether there is much doubt in the market. When prices are heading up and there is little uncertainty or doubt, then it is quite likely that the underlying upward trend will continue. If volatility is high as measured by the VIX, there is great risk that the trend will continue.

What the VIX Tells Us About Prices
When it comes to security prices, the VIX can indicate whether it is properly valued or improperly valued. When the VIX is high, the believe is that securities are not properly valued, but as that volatility reduces to a more-normal state, that price is more likely to "stick" or continue along its path.

Trading Based on the VIX
Many traders love making trades when the VIX is high. This is because prices will swing broadly from their "normal" range, allowing for greater opportunity for profit (and losses as well). However, when volatility is reduced, the indication is that the underlying trend will probably continue, meaning that returns (and losses) are a lot more predictable in the short-term when the VIX value is low. All it takes to make big money when the VIX is high (above 30-40) is to make the right call on the direction that the price will swing (up or down) and position your investment accordingly.

Evidently, the easier yet less lucrative method is to go with the flow (low VIX value) rather than make an educated gamble (high VIX value).
With the above in mind, the currently underlying trend is expected to continue. This means that the market's remarkable rebound during 2009 is not so much a quick, unjustifiable "bounce" as it is a recovery. And with the VIX values progressively getting lower, the indication is that the recovery period is really just getting started.

from Investment News, Investment Strategies, Investment Opportunities - Feed http://www.quantitativeinvestmentgroup.com/how-to-invest-using-the-volatility-index/

What is Stock Volatility?

Volatility is a measure of the rate and magnitude of the change in the stock's value (up or down) of the underlying which is stated as a percentage over one-year. A higher volatility means there is more than average price changed during a trading day and a lower volatility means there is less than average change in the price of stock. When it is mathematically expressed, it is equal to the standard deviation price changes at the end of one-year period.
A stock having higher volatility is more likely that stock price change move towards deeper into the money. When volatility is high, premium of an option will be higher and vice versa. Traders would be benefited if they have good understanding of volatility. This helps them to estimate how an option is valued relating to the trends of the underlying stock.
A low volatile stock has good chance of price not moving at all. Thus, volatility is an indication which tells about the likelihood of the price of a stock going up or down. If you have purchased a call on a stock expecting to gain profit in the short run, you expect the price of stock to go up. This will give better chances of call becoming worthy in future. More the chances of call becoming worth in future, the premium on the option will be increasing. Keeping other things unchanged, it is good to sell an option whose implied volatility is high and buy if its implied volatility is low.
Volatility measures market expectations regarding how price of underlying asset is expected to trade in future. Implied volatility and historical volatility are the two types of volatility. Historical volatility is also known as statistical volatility. Using current price of an underlying asset as base, implied volatility reflects expected future volatility from the existing price to the price at the expiration. Where stock market perceives volatility for an option in the future is known as implied volatility. One can get the future value of implied option volatility for the future. One can also project the direction of the stock price using historical volatility and fair value of the stock along with implied volatility.
Historical volatility measures the stock's volatility based on how the underlying asset had been traded in the past. It refers to the past price movements of an underlying asset. Historical volatility helps in determining the possible magnitude future moves of underlying asset. It involves a statistical calculation and tells us how quick price movements are in a given time frame. This is the standard deviation which analyzes the range of data points against the average.
One can draw conclusion about the current and the future trends of option volatility by reviewing the historical volatility along with fundamental analysis. This is more important as one can calculate and expect the feasible prices changes of an underlying asset in the future.
Historical volatility shows how volatility has been in the past whereas implied volatility views expected future volatility based on current option prices. One can see the expected trading range of the market with historical volatility and implied volatility acts as an indicator of the current market sentiment.

from Investment News, Investment Strategies, Investment Opportunities - Feed http://www.quantitativeinvestmentgroup.com/what-is-stock-volatility/