Volatility Strategies: Profiting From Market Fluctuations In Texas

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Volatility Strategies: Profiting From Market Fluctuations In Texas – Stock market volatility has increased since the end of 2021. As one of the stock investors who lived through the ups and downs of the market, I remember how it all began.

It was the day after Thanksgiving. Technology stocks began to plummet, with many of the stocks I tracked dropping in double digits in a single day.

Volatility Strategies: Profiting From Market Fluctuations In Texas

Volatility Strategies: Profiting From Market Fluctuations In Texas

From that point on, technology stocks and the broader S&P500 began to decline. About a year later, on December 28, the Nasdaq bottomed out, breaking more than 35% off its all-time high.

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Stock market volatility refers to the frequency and magnitude of changes in the price of stocks traded in a particular market. High volatility means stock prices fluctuate quickly and unpredictably, while low volatility indicates more stable prices. One way to measure volatility is the VIX index.

The Chicago Options Exchange Volatility Index (CBOE), or VIX, is one of the most widely used measures of stock market volatility. The VIX is sometimes referred to as the “fear index” as it tracks the expected volatility of the S&P 500 over the next 30 days.

While this may not be a reliable predictor, it does give you a sense of overall volatility at the moment. Here is the VIX chart for the last 12 months:

Implied volatility is gradually declining after more than a year of growth. It began to decline in October 2022, around the time the S&P 500 hit bottom.

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The reason I am sharing this recent example of volatility is because it always follows the same pattern. When the economy faces headwinds, investors are highly disunited and more cautious, which causes large swings in the market.

Compare this to times when most investors are on the same wavelength. A good example of this is April 2020, when the Federal Reserve injected massive amounts of capital into the economy.

The stock market went up in a straight line. For months, you couldn’t find serious investors who weren’t bullish.

Volatility Strategies: Profiting From Market Fluctuations In Texas

But after a while, some investors paused and realized that all this stimulus would cause a number of other problems, including inflation and supply shocks. Since then, the financial community has not been united.

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This is how I look at the stock market. If there is consensus on a direction, we will move in that direction along a clear line. Think about everything in 2022. All investors were wary of inflation and looming recession risks.

But as inflation declined and the economy continued to grow, more investors began to become bullish. That is why the S&P500 and Nasdaq 100 indexes rose during the first five months of the year.

This gap is best illustrated by Ken Griffin and his hedge fund Citadel. In an interview with Bloomberg, Griffin acknowledged that his team believes the US economy will avoid a recession in 2023.

Source: Twitter But Griffin himself was skeptical and believed that a recession would occur in the economy in mid-late 2023.

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Warren Buffett recently stated that the “incredible period” of the economy is already over and that “most of our businesses will report lower earnings this year than they did last year.” This means he is seeing a slowdown, but not necessarily a recession.

Jeremy Siegel, renowned professor of finance at the Wharton School of the University of Pennsylvania, said this in his recent market review:

“The market is poised for a moderate recession and of course there is a risk that it could worsen further until the Fed actually moves to cut rates.

Volatility Strategies: Profiting From Market Fluctuations In Texas

All this means: no one knows what will happen. And investors will place their bets in the stock market. This is what makes the stock market always right in the long run.

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If you’re a long-term investor and you’re bogged down by volatility, you’ve lost. Many traders and investors believe that high volatility means more opportunities for profit.

While that may be true for hedge funds like Citadel (they made $16 billion in net income in 2022).

Recent trades that have affected volatility have ended in failure. In February 2023, the WSJ reported that VIX growth rates were higher than at any time since March 2020.

Source: Wall Street Journal. At the time of this writing, the VIX index was 15-20% lower than at the time of the publication of the WSJ article.

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The old adage “you can’t predict the market” seems to be interpreted by many investors as a challenge rather than an absolute.

That’s what everyday investors think. I don’t know where this mindset comes from, but unless you’re in finance or managing other people’s money, you don’t need to hedge against anything.

If you have a long term strategy that works, stick with it. Don’t get caught up in volatility. And, of course, don’t try to “protect” yourself because you’re only giving up profits.

Volatility Strategies: Profiting From Market Fluctuations In Texas

The long-term direction of the stock market remains upward. If you keep investing long enough, volatility is not an issue.

What Is Volatility?

My strategy is to invest in the S&P500 index fund. Last year it was not interesting to look at my portfolio. But who cares?

I continue to invest and I understand that high volatility does not change anything in my strategy. Instead of worrying about short-term downturns, focus on improving your discipline.

If you as an investor see the market moving up and down, how do you feel? You probably experience a mixture of emotions, including excitement, fear, and anxiety.

Market volatility may seem intimidating or risky, but it’s actually an opportunity to improve your discipline and double down on your investment strategy.

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This will help you develop the fortitude you need for long-term investment success. As a disciplined investor, you are better equipped to navigate market fluctuations. Volatility is a statistical measure of the spread in returns for a particular security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured either by the standard deviation or by the variance of returns on the same security or market index.

In securities markets, volatility is often associated with large swings in either direction. For example, when the stock market rises and falls by more than one percent for a long period of time, it is called a volatile market. The volatility of an asset is a key factor in the pricing of option contracts.

Volatility often refers to the degree of uncertainty or risk associated with the size of changes in the value of a security. Higher volatility means that the value of a security can potentially be spread over a wider range of values. This means that the price of a security can change dramatically over a short period of time in either direction. Lower volatility means that the value of a security does not fluctuate dramatically and tends to be more stable.

Volatility Strategies: Profiting From Market Fluctuations In Texas

One way to measure changes in an asset is to quantify the daily return (percentage change per day) of the asset. Historical volatility is based on historical prices and represents the degree of volatility in an asset’s returns. This number is without units and is expressed as a percentage.

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While variance reflects the variance of returns around the average value of an asset as a whole, volatility is a measure of that variance limited to a specific time period. Thus, we can report daily, weekly, monthly or yearly volatility. Therefore, it is useful to consider volatility as an annual standard deviation.

Volatility is often calculated using variance and standard deviation (standard deviation is the square root of the variance). Since volatility describes changes over a period of time, you simply take the standard deviation and multiply it by the square root of the number of periods you are considering:

For simplicity, let’s assume that the monthly closing prices of stocks are between $1 and $10. For example, the first month costs $1, the second month costs $2, and so on. To calculate the variance, follow the five steps below.

In this case, the resulting variance is $8.25. The square root is taken to obtain the standard deviation. This equals $2.87. This is a measure of risk that shows how the values ​​are distributed around the average price. This gives traders an idea of ​​how far the price can deviate from the average.

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If prices are randomly selected from a normal distribution, then about 68% of all data values ​​will be within one standard deviation. Ninety-five percent of the data values ​​will be within two standard deviations (2 x 2.87 in our example), and 99.7% of all values ​​will be within three standard deviations (3 x 2.87).

In this case, values ​​from $1 to $10 are not randomly distributed along a bell curve; quicker. they are evenly distributed. Thus, the expected percentages of 68-95-99.7% are not met. Despite this limitation, standard deviation is often used by traders because price returns datasets often resemble a normal distribution (bell curve) more than in this example.

Equity price volatility is considered to be moving towards a mean, meaning that periods of high volatility are often moderate, while periods of low volatility are intensified, fluctuating around some long-term average.

Volatility Strategies: Profiting From Market Fluctuations In Texas

Implied volatility (IV), also known as predicted volatility, is one of the most important metrics for options traders. As the name suggests, this allows them to determine how volatile the market will be in the future. This concept also gives traders

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